case

Jodie Fisher, Accuser In HP Case, Says Her Work Was Cut After Turning Down CEO’s Advances

August 18, 2010

SAN FRANCISCO — The woman whose sexual harassment allegations led to the ouster of former Hewlett-Packard Co. CEO Mark Hurd claimed her work with the company dried up because she rebuffed Hurd’s advances, a person close to the investigation told The Associated Press. The substance of the complaint that led to Hurd’s resignation from the world’s largest technology company had not been publicly known until late Tuesday. Hurd denies making any advances on Jodie Fisher, who worked as a contractor for HP’s marketing department from 2007 to 2009, according to this person, who requested anonymity because of not being authorized to discuss the case. Fisher, 50, is an actress and businesswoman who helped HP organize networking events for customers and introduced executives to each other. She and Hurd would often dine together after the events. HP determined that Hurd didn’t violate the company’s sexual harassment policies in his interactions with Fisher. But the company said it did find falsified expense reports connected to those meetings, and said those led to the board’s unanimous decision to seek Hurd’s resignation. Hurd says he didn’t prepare his own expenses and that Fisher’s name was not intentionally left off any reports. He resigned August 6 and was given a severance package that could top $40 million. Fisher’s lawyer, celebrity attorney Gloria Allred, declined to comment, as did an HP spokesman. Fisher worked more than a dozen events in her two years with HP, the bulk of which occurred in her first year, according to the person with knowledge of the investigation. She was paid up to $5,000 per event. Her work dwindled in the second year because HP’s marketing budget was cut and had nothing to do with her relationship with Hurd, the person said. Hurd settled with Fisher for an undisclosed amount before his resignation. HP had urged Hurd for weeks to settle the case, and Hurd eventually agreed because his lawyers convinced him it would be cheaper than taking the case to trial, according to the person close to the investigation. Hurd had decided to step down a week before the resignation was announced because the board wanted to publicly disclose the harassment allegation based on advice from a public relations firm and lawyers, even though the company’s investigation found the claims to be without merit, the person said. Hurd claims he still doesn’t have an accounting for all the expenses he is alleged to have falsified.

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Philadelphia Housing Director Facing Foreclosure

August 14, 2010

PHILADELPHIA — A bank has foreclosed on a $615,000 condominium owned by the head of the Philadelphia Housing Authority, who earned $350,000 last year leading the nation’s fourth-largest public-housing agency. Carl R. Greene, PHA’s executive director, bought the three-bedroom, 2,100-square-foot condo in the upscale Naval Square development in 2007. He put down $215,000 in cash and took out a $400,000 mortgage, city records show. Greene, 53, stopped making payments on or around April 1, and three months later owed more than $7,500 in missed payments and late fees, according to the bank’s July 27 lawsuit. A spokesman denied that Greene has any financial problems, and said he is instead locked in a dispute with the mortgage company. Spokesman Kirk Dorn said he did not know the nature of the dispute, though he acknowledged the public’s interest in the case. “We all understand the irony of the situation,” Dorn said. “We’re very concerned about the appearance of the head of a large housing organization not paying his mortgage. But until the matter is resolved, Mr. Greene is simply not willing to air this dispute,” he said. Because of the missed payments, Wells Fargo is demanding that Greene pay in full the $386,685 outstanding on the mortgage. Greene himself did not immediately return a call for comment left at the housing agency. He is scheduled to appear in court on Sept. 16 to take part in the city’s foreclosure-prevention program, court records show. No lawyer is listed for him in the case file. The lawyer listed for Wells Fargo did not immediately return a message. Greene took over at PHA in 1998, after previously working as executive director of the Detroit Housing Commission, and also working for housing authorities in Atlanta and Washington, D.C. Greene, who is unmarried and has no dependents, earned a base salary of $306,370 plus a $41,188 bonus last year, Dorn confirmed. The condominium appears to be the first property he has owned in Philadelphia, according to city real estate records. The Philadelphia Inquirer first reported on the foreclosure proceedings.

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Wells Fargo Overdraft Lawsuit: Bank Ordered To Pay $203 MILLION In Fees Over ‘Unfair’ Charges

August 11, 2010

NEW YORK (AP, Eileen Aj Connelly) — A federal judge in California ordered Wells Fargo & Co. to change what he called “unfair and deceptive business practices” that led customers into paying multiple overdraft fees, and to pay $203 million back to customers. In a decision handed down late Tuesday, U.S. District Judge William Alsup accused Wells Fargo of “profiteering” by changing its policies to process checks, debit card transactions and bill payments from the highest dollar amount to the lowest, rather than in the order the transactions took place. That helped drain customer bank accounts faster and drive up overdraft fees, a policy Alsup referred to as “gouging and profiteering.” The ruling detailed the experiences of two Wells Fargo customers who used their debit cards for multiple small purchases, and were then charged hundreds in overdraft fees because the order the purchases were cleared by the bank depended on the amounts. The judge found the customers, who were part of a class action, were not properly informed of the bank’s policies on processing payments and were unaware the bank would allow debit purchases to go through when their accounts were overdrawn. “Internal bank memos and e-mails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole, motive was to maximize the number of overdrafts,” Alsup wrote. That policy would “squeeze as much as possible” from customers with overdrafts, in particular from the 4 percent of customers who paid what he called “a whopping 40 percent of its total overdraft and returned-item revenue.” The judge dismissed Wells Fargo’s arguments that customers wanted and benefited from the policies, and detailed evidence he said showed efforts to obscure the practices in statements and other materials. Wells Fargo’s online banking system, for example, would display pending purchases in chronological order, “leading customers to believe that the processing would take place in that order.” “The supposed net benefit of high-to-low resequencing is utterly speculative,” he wrote. “Its bone-crushing multiplication of additional overdraft penalties, however, is categorically assured.” Alsup also criticized the bank for allowing overdraft purchases after accounts had been drained by offering a “shadow line of credit” that customers were unaware existed. The decision noted that the Federal Reserve has outlawed some of the practices detailed in the case, most notably debit card overdrafts permitted without customers agreeing to accept overdraft protection. Judge Alsup ordered Wells Fargo to stop posting transactions in high-to-low order by Nov. 30 and to reverse overdraft fees charged to customers from Nov. 15, 2004, to June 30, 2008, as a result of the policy. A study cited in the decision by a Wells Fargo witness put the restitution at “close to $203 million.” Wells Fargo spokeswoman Rochele Messick said the bank is “disappointed” with the ruling. “We don’t believe the ruling is in line with the facts of this case and we plan to appeal,” she said. Messick noted that Wells Fargo changed its policies earlier this year, and customers can no longer incur more than four overdraft charges in one day. Wells Fargo shares closed Wednesday trading down $1.47, or 5.3 percent, at $26.30, as the broader markets dropped sharply on economic concerns, with banks being particularly hard hit. The case, heard in the U.S. District Court for Northern California, is Gutierrez vs. Wells Fargo.

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Mark Hurd Settlement: Ousted HP CEO Settles With Sexual Harassment Accuser

August 8, 2010

SAN FRANCISCO — The woman at the center of the sexual harassment claim that forced the resignation of Hewlett-Packard Co. CEO Mark Hurd revealed her identity Sunday and said she is “surprised and saddened” that Hurd lost his job. Jodie Fisher, 50, knew Hurd through her contract jobs with HP’s marketing department from 2007 to 2009. She was paid up to $5,000 per event to greet people and make introductions among executives attending HP events that she helped organize. Details revealed Sunday show that she has also worked as a saleswoman, an executive at a commercial real estate company, and as an actress. She appeared in some racy R-rated movies in her 30s and most recently was on a dating show called “Age of Love,” in which women competed for the attention of tennis star Mark Philippoussis. Her lawyer, celebrity attorney Gloria Allred, said Fisher is a single mother who is “focused on raising her young son.” Fisher repeated that she and Hurd never had a sexual relationship but neither she nor Allred would discuss details of the harassment claim. That claim set off the chain of events that led to the discovery of allegedly falsified expense reports for dinners Hurd had with Fisher and culminated in Hurd’s forced resignation Friday from the world’s largest technology company. Fisher acknowledged that she and Hurd have settled the matter. A person familiar with the case told The Associated Press that Hurd agreed to pay Fisher but would not reveal the size of the payment. “I was surprised and saddened that Mark Hurd lost his job over this,” Fisher said in a statement. “That was never my intention.” Hurd settled with Fisher on Thursday, a day before he resigned. The settlement did not involve a payment from HP, the person close to the case said. This person, who spoke on a condition of anonymity, was not authorized to speak publicly about the issue. The investigation by HP’s board of directors found that Hurd listed other people as his dinner partners on expense reports when he’d been out with Fisher. HP also claimed Hurd arranged for her to be paid for work she didn’t do. There was only one instance in which that occurred, the person close to the case said, but it was for an event that was canceled at the last minute and that Fisher’s contract required that she would be paid unless an event was canceled 30 days in advance. The amount of money in question wasn’t known. Hurd, 53, insists they were legitimate business expenses. Hurd says the errors in the reports may have been entered unwittingly by an assistant, according to the person close to the case. The company determined Hurd didn’t violate its sexual harassment policy but broke its rules of conduct and irreparably harmed his credibility and integrity. Interim CEO Cathie Lesjak defended the company’s decision on Sunday. She said HP acted appropriately and that investors and big customers she has spoken with have been “extremely supportive.” “They respect how we dealt with the situation with transparency and speed. The bottom line is, the HP brand is strong,” she said on a conference call with reporters. “One thing happened in this company on Friday – that is the CEO left. The rest of the company did not change.” Lesjak declined to give details about the expenses Hurd was alleged to have doctored. HP now must find a new leader to keep it on the course Hurd mapped out. Under Hurd, HP spent more than $20 billion on acquisitions to transform itself from a computer and printer maker dependent on ink sales for profits to a well-rounded seller of hardware and lucrative business services. Hurd, who spent 25 years at ATM maker NCR Corp. before coming to HP in April 2005, became a Wall Street darling. HP’s market value nearly doubled during his five years. In recent weeks, he was in talks for a three-year contract that could have been worth $100 million, the person close to the case said. Those went off track when harassment allegations surfaced, this person said. Hurd will get about $28 million in cash and stock in severance. HP’s stock fell nearly 10 percent to $41.85 in after-hours trading, when the news was released after the close of markets Friday. The company has a deep bench in management and the stock drop was reactive and doesn’t reflect the company’s prospects, an analyst said. “I don’t view his departure as catastrophic,” said Dinesh Moorjani, an analyst with Gleacher & Co. “The strategy is working fine. The level of uncertainty for me is relatively low just given the circumstances. This wasn’t a one-man company.” Internal candidates for a successor could have an edge, given that Hurd and predecessor Carly Fiorina – who got the boot in 2005 over concern about her management style and her decision to buy Compaq Computer – both came from outside HP. Hurd’s ouster is the third in five years at HP’s top echelon. First was Fiorina’s in 2005, then former Chairwoman Patricia Dunn was ousted in 2006 amid a boardroom spying scandal that involved spying on reporters’ and directors’ phone records to suss out the source of leaks to the media. “It says they’re off track in some fundamental way,” said Stephen Diamond, associate professor at Santa Clara University School of Law and an expert on business law. “The first thing is, they have to find the right kind of CEO,” he added. “And I think what that CEO needs to do is come in and say, ‘How many board members were here during the last two scandals? If you were, please resign now.”

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Ford Vox: Top 5 Orthopedic Fields Indebted to the Device Industry

July 23, 2010

It’s true. Factors other than our patients influence the care physicians provide. In the case of American orthopedic surgery, as I write for The Atlantic , Factor X is the medical device industry. Today, most orthopedic surgeons train one or two more years extra (that’s after eight years of medical school and residency) to focus on specific surgeries that use specific equipment. This wasn’t the case a few decades ago. At the same time this trend took off, the companies developing those procedures and marketing that equipment started cutting checks to grease the orthopedic training machine everywhere from America’s top hospitals to small private practices. Despite new rules (detailed in The Medical-Industrial Complex ) the money continues to flow. Here’s my 2010 rank list of orthopedic fields as favored by the medical device industry: 1. Spine Surgery 2. Hip and Knee Surgery 3. Shoulder and Elbow Surgery 4. Trauma Surgery 5. Orthopedic Oncology The list is based on the number of training slots available in a given area versus the industry money accepted by the training programs in that area (not gross total funding). It’s approximate, given that the number of slots fluctuate, and it’s based on the records of the two industry-fed funds for which I was able to obtain records: OREF and OMeGA. Read the whole story here.

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Charles Gasparino: Lloyd Blankfein’s Days Are Numbered as Chairman of Goldman Sachs

July 16, 2010

It’s a testament to the odd world in which we live that when a Wall Street firm pays a $550 million fine by conceding negligence in how it dealt with clients, its stock surges, adding billions of dollars in market value for the firm’s shareholders. But that’s what’s happening to Goldman Sachs, as it reached its long awaited settlement with the Securities and Exchange Commission over how it sold a basket of mortgage related debt to investors in 2007. Back when the SEC brought the case, the conventional wisdom on Wall Street and the financial media was that Goldman didn’t have to settle — the case was weak and Goldman is, after all, Goldman. As I wrote on these page back then, Goldman would have to settle because: (a) the SEC dug up some real questionable activity; and (b) no Wall Street firm, not even one with the ties to government that Goldman possesses can go to war with its primary regulator. Now that Goldman has indeed settled, the news is being spun, again mostly by the financial media, that the deal with the SEC was a victory for Goldman’s CEO Lloyd Blankfein, who survived the investigation largely unscathed, paying a measly $550 million to the government (equivalent to a few days trading gains at Goldman) and without having to give up any power, such as relinquishing his role as chairman of the board, as senior executives both inside Goldman and at competing firms believed would be part of any settlement. Well, if history is any guide, Blankfein may not go tomorrow, or even next month, but sometime in 2011, Blankfein will at the very least no longer be chairman of Goldman, and may also be forced out of the firm altogether. If you don’t believe me ask former Citigroup CEO Sandy Weill. Like Blankfein, Weill (at least on paper) was a good CEO from an operational standpoint. Following the creation of Citigroup in 1998, shares of the big bank soared. The bank was what’s known as a Wall Street darling for its strong earnings and a surging stock price, and Weill was regarded as the King of Wall Street, having engineered the largest financial deal ever when he merged his company, the Travelers Group brokerage, insurance and investment banking empire, with commercial banking powerhouse Citicorp. At the height of his power, Weill suddenly popped up on the radar screen of New York Attorney General Eliot Spitzer. Before Spitzer got involved with hookers and became a TV host, he was the sheriff of Wall Street, looking to right wrongs from the last great scandal, the internet bubble where firms sold worthless dotcom and tech stocks to unsuspecting investors. Emails he uncovered showed that Weill at least did something stupid, if not fraudulent: He pressured an analyst, Jack Grubman, to inflate his stock rating on telecom giant AT&T, which was an investment banking client (Weill also sat on AT&T’s board, while AT&T CEO Michael Armstrong sat on Citi’s board) Grubman wrote in an email that as a favor for upgrading the stock, Weill got his kids in an exclusive pre-school. The scandal, was described by the Wall Street Journal , as a “kid pro quo.” Weill continued to deny wrongdoing and was never charged. Citigroup, however, was charged with fraud and ended up paying a $400 fine to settle the matter, but Weill appeared to have retained his control of the bank. The initial reaction in the press and among his peers in the financial business was that Weill had won, by having the bank pay a relatively small fine, and his status as CEO and the King of Wall Street secure. Not quite. A few months later, Citigroup announced that Weill was stepping down as CEO, handing that job to Chuck Prince, who basically negotiated the settlement package. Citigroup maintained that the two moves were unrelated. But people in Spitzer’s office told me they really weren’t: While negotiating the settlement, Citigroup’s board made it clear to investigators that Weill’s days were numbered at the top of the firm that he founded. Spitzer was merely affording Weill a graceful exit in an effort to end the case. Full disclosure: I have no knowledge that Goldman’s board has tacitly agreed to pull a Weill on Blankfein and has plans for him to step aside, but the circumstances involving the two men are so remarkably similar. While Blankfein wasn’t directly involved in the questionable trade that landed Goldman in trouble, he is responsible for remaking Goldman into predatory trading culture that has caught the attention of regulators, Congressional committees (recall Sen. Carl Levin badgering Goldman traders for selling “shitty” investments to their clients) and hurt Goldman’s once stellar reputation, as Weill’s actions hurt Citigroup’s. Some would say that’s where the comparisons end; Citigroup deals with the general public that buys stocks through its brokerage unit (Smith Barney) and makes deposits in its branch banking offices. Goldman deals with large sophisticated investors who couldn’t care less how Darwinian the company behaves. That used to be true, but no more. Goldman’s image has been battered, not as bad as say a company like BP, but not far behind. And image does count these days given the scrutiny and oversight placed on Wall Street and the banks following the financial collapse-induced bailouts. Now that financial reform has been passed, Goldman will have to cut back on some of that aggressive trading that powered its earnings and was Blankfein’s forte. That means it will have to devote more and more resources to developing its client business and relationships, convincing blue chip companies that it is the right firm to handle delicate negotiations involving mergers, acquisitions, and other corporate financing assignments. More and more, these clients do care about image (ask yourself why has so many top companies embraced the useless but politically correct “green agenda”). In fact some have already jettisoned Goldman as scrutiny of the firm grew over the past year. Who is the right guy to change Goldman’s image to fit the new paradigm it faces? It’s not Lloyd Blankfein and that’s why he won’t survive.

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Charles Gasparino: Lloyd Blankfein’s Days Are Numbered as Chairman of Goldman Sachs

July 16, 2010

It’s a testament to the odd world in which we live that when a Wall Street firm pays a $550 million fine by conceding negligence in how it dealt with clients, its stock surges, adding billions of dollars in market value for the firm’s shareholders. But that’s what’s happening to Goldman Sachs, as it reached its long awaited settlement with the Securities and Exchange Commission over how it sold a basket of mortgage related debt to investors in 2007. Back when the SEC brought the case, the conventional wisdom on Wall Street and the financial media was that Goldman didn’t have to settle — the case was weak and Goldman is, after all, Goldman. As I wrote on these page back then, Goldman would have to settle because: (a) the SEC dug up some real questionable activity; and (b) no Wall Street firm, not even one with the ties to government that Goldman possesses can go to war with its primary regulator. Now that Goldman has indeed settled, the news is being spun, again mostly by the financial media, that the deal with the SEC was a victory for Goldman’s CEO Lloyd Blankfein, who survived the investigation largely unscathed, paying a measly $550 million to the government (equivalent to a few days trading gains at Goldman) and without having to give up any power, such as relinquishing his role as chairman of the board, as senior executives both inside Goldman and at competing firms believed would be part of any settlement. Well, if history is any guide, Blankfein may not go tomorrow, or even next month, but sometime in 2011, Blankfein will at the very least no longer be chairman of Goldman, and may also be forced out of the firm altogether. If you don’t believe me ask former Citigroup CEO Sandy Weill. Like Blankfein, Weill (at least on paper) was a good CEO from an operational standpoint. Following the creation of Citigroup in 1998, shares of the big bank soared. The bank was what’s known as a Wall Street darling for its strong earnings and a surging stock price, and Weill was regarded as the King of Wall Street, having engineered the largest financial deal ever when he merged his company, the Travelers Group brokerage, insurance and investment banking empire, with commercial banking powerhouse Citicorp. At the height of his power, Weill suddenly popped up on the radar screen of New York Attorney General Eliot Spitzer. Before Spitzer got involved with hookers and became a TV host, he was the sheriff of Wall Street, looking to right wrongs from the last great scandal, the internet bubble where firms sold worthless dotcom and tech stocks to unsuspecting investors. Emails he uncovered showed that Weill at least did something stupid, if not fraudulent: He pressured an analyst, Jack Grubman, to inflate his stock rating on telecom giant AT&T, which was an investment banking client (Weill also sat on AT&T’s board, while AT&T CEO Michael Armstrong sat on Citi’s board) Grubman wrote in an email that as a favor for upgrading the stock, Weill got his kids in an exclusive pre-school. The scandal, was described by the Wall Street Journal , as a “kid pro quo.” Weill continued to deny wrongdoing and was never charged. Citigroup, however, was charged with fraud and ended up paying a $400 fine to settle the matter, but Weill appeared to have retained his control of the bank. The initial reaction in the press and among his peers in the financial business was that Weill had won, by having the bank pay a relatively small fine, and his status as CEO and the King of Wall Street secure. Not quite. A few months later, Citigroup announced that Weill was stepping down as CEO, handing that job to Chuck Prince, who basically negotiated the settlement package. Citigroup maintained that the two moves were unrelated. But people in Spitzer’s office told me they really weren’t: While negotiating the settlement, Citigroup’s board made it clear to investigators that Weill’s days were numbered at the top of the firm that he founded. Spitzer was merely affording Weill a graceful exit in an effort to end the case. Full disclosure: I have no knowledge that Goldman’s board has tacitly agreed to pull a Weill on Blankfein and has plans for him to step aside, but the circumstances involving the two men are so remarkably similar. While Blankfein wasn’t directly involved in the questionable trade that landed Goldman in trouble, he is responsible for remaking Goldman into predatory trading culture that has caught the attention of regulators, Congressional committees (recall Sen. Carl Levin badgering Goldman traders for selling “shitty” investments to their clients) and hurt Goldman’s once stellar reputation, as Weill’s actions hurt Citigroup’s. Some would say that’s where the comparisons end; Citigroup deals with the general public that buys stocks through its brokerage unit (Smith Barney) and makes deposits in its branch banking offices. Goldman deals with large sophisticated investors who couldn’t care less how Darwinian the company behaves. That used to be true, but no more. Goldman’s image has been battered, not as bad as say a company like BP, but not far behind. And image does count these days given the scrutiny and oversight placed on Wall Street and the banks following the financial collapse-induced bailouts. Now that financial reform has been passed, Goldman will have to cut back on some of that aggressive trading that powered its earnings and was Blankfein’s forte. That means it will have to devote more and more resources to developing its client business and relationships, convincing blue chip companies that it is the right firm to handle delicate negotiations involving mergers, acquisitions, and other corporate financing assignments. More and more, these clients do care about image (ask yourself why has so many top companies embraced the useless but politically correct “green agenda”). In fact some have already jettisoned Goldman as scrutiny of the firm grew over the past year. Who is the right guy to change Goldman’s image to fit the new paradigm it faces? It’s not Lloyd Blankfein and that’s why he won’t survive.

Read the full article →

SEC Settles With Fired Lawyer Who Accused Agency Of Blocking Hedge Fund Investigation

June 30, 2010

WASHINGTON — The Securities and Exchange Commission is paying $755,000 to settle a lawsuit with a former staff lawyer who accused the agency of blocking his investigation of a prominent hedge fund. The SEC settlement of Gary Aguirre’s wrongful termination claim resolved a long-running controversy that prompted scrutiny in Congress and by the SEC inspector general. The settlement was announced Tuesday by the Government Accountability Project. Aguirre was fired by the SEC in September 2005. He went public in 2006 with allegations of interference by SEC officials in the probe of Pequot Capital Management and improper deference to a Wall Street executive whom Aguirre wanted to interview. That prompted an investigation by Republican staff of the Senate Judiciary and Finance Committees. The SEC initially took no enforcement action in the case, which was started in 2004 and closed in 2006. The agency reopened it in January 2009 after documents emerged in a divorce proceeding showing that Pequot began paying $2.1 million to a key witness in the case in mid-2007. Last month, Pequot and its founder and chairman, Arthur Samberg, agreed to pay a total of $28 million to settle the SEC’s charges of insider trading of Microsoft Corp. shares. The SEC alleged that the hedge fund traded Microsoft shares on confidential information provided by a former employee of the technology giant whom it later hired. Pequot, whose core hedge fund was liquidated last year, and Samberg, a well-known money manager and philanthropist, neither admitted nor denied wrongdoing. The $755,000 being paid to Aguirre represents his salary for four years and 10 months plus his attorneys’ fees, according to the Government Accountability Project, a group that works with whistleblowers. The group said it may be the largest settlement of its kind. Under terms of the settlement, which was approved by a judge at the federal Merit Systems Protection Board, Aguirre agreed to drop two related cases against the SEC. SEC spokesman John Nester said the settlement “resolves all outstanding litigation between the parties and reflects the agency’s determination to focus on its core mission of protecting investors.” Aguirre, in a statement, said “I think it’s fair to the public that the SEC pays for my work over the past four years and 10 months, since it generated $28 million to the U.S. Treasury. But it’s a shame the team I worked with at the SEC did not get to complete the Pequot investigation. The filing of the case in 2005 or 2006, before the financial crisis, would have been exactly what the Wall Street elite needed to hear at the perfect moment: the SEC goes after big fish too.” In August 2007, the Republican staff of the two Senate committees published a scathing report criticizing the SEC’s decision to fire Aguirre and close the first Pequot investigation. Sens. Charles Grassley, R-Iowa, and Arlen Specter of Pennsylvania, then a Republican, spoke critically on the Senate floor that year about the SEC’s handling of the Pequot investigation. The SEC inspector general, David Kotz, in a report issued in late 2008, found there were “serious questions” about the impartiality and fairness of the agency’s probe of Pequot. “The settlement with Mr. Aguirre shows that the SEC is finally acknowledging its mistake,” Specter said in a statement Tuesday.

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SEC Paying $755,000 To Settle With Gary Aguirre, Lawyer Fired While Investigating Hedge Fund

June 29, 2010

WASHINGTON — The Securities and Exchange Commission is paying $755,000 to settle a lawsuit with a former staff lawyer who accused the agency of blocking his investigation of a prominent hedge fund. The SEC settlement of Gary Aguirre’s wrongful termination claim resolved a long-running controversy that prompted scrutiny in Congress and by the SEC inspector general. The settlement was announced Tuesday by the Government Accountability Project. Aguirre was fired by the SEC in September 2005. He went public in 2006 with allegations of interference by SEC officials in the probe of Pequot Capital Management and improper deference to a Wall Street executive whom Aguirre wanted to interview. That prompted an investigation by Republican staff of the Senate Judiciary and Finance Committees. The SEC initially took no enforcement action in the case, which was started in 2004 and closed in 2006. The agency reopened it in January 2009 after documents emerged in a divorce proceeding showing that Pequot began paying $2.1 million to a key witness in the case in mid-2007. Last month, Pequot and its founder and chairman, Arthur Samberg, agreed to pay a total of $28 million to settle the SEC’s charges of insider trading of Microsoft Corp. shares. The SEC alleged that the hedge fund traded Microsoft shares on confidential information provided by a former employee of the technology giant whom it later hired. Pequot, whose core hedge fund was liquidated last year, and Samberg, a well-known money manager and philanthropist, neither admitted nor denied wrongdoing. The $755,000 being paid to Aguirre represents his salary for four years and 10 months plus his attorneys’ fees, according to the Government Accountability Project, a group that works with whistleblowers. The group said it may be the largest settlement of its kind. Under terms of the settlement, which was approved by a judge at the federal Merit Systems Protection Board, Aguirre agreed to drop two related cases against the SEC. SEC spokesman John Nester said the settlement “resolves all outstanding litigation between the parties and reflects the agency’s determination to focus on its core mission of protecting investors.” Aguirre, in a statement, said “I think it’s fair to the public that the SEC pays for my work over the past four years and 10 months, since it generated $28 million to the U.S. Treasury. But it’s a shame the team I worked with at the SEC did not get to complete the Pequot investigation. The filing of the case in 2005 or 2006, before the financial crisis, would have been exactly what the Wall Street elite needed to hear at the perfect moment: the SEC goes after big fish too.” In August 2007, the Republican staff of the two Senate committees published a scathing report criticizing the SEC’s decision to fire Aguirre and close the first Pequot investigation. Sens. Charles Grassley, R-Iowa, and Arlen Specter of Pennsylvania, then a Republican, spoke critically on the Senate floor that year about the SEC’s handling of the Pequot investigation. The SEC inspector general, David Kotz, in a report issued in late 2008, found there were “serious questions” about the impartiality and fairness of the agency’s probe of Pequot. “The settlement with Mr. Aguirre shows that the SEC is finally acknowledging its mistake,” Specter said in a statement Tuesday.

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Goldman Sachs’ Bayou Fine: Firm Told To Pay $20.6 Million In Hedge Fund Ponzi Scheme

June 26, 2010

NEW YORK — Goldman Sachs Group Inc. has been ordered to pay $20.6 million to scammed investors who say the investment bank should have known about the Ponzi scheme pulled off by the collapsed Bayou Hedge Funds. A three-person arbitration panel of the Financial Industry Regulatory Authority held the bank’s Goldman Sachs Execution & Clearing unit, formerly known as Spear Leeds & Kellogg, liable in the dispute. Stamford, Conn.-based Bayou collapsed in 2005, after the firm’s then-CEO Samuel Israel III and Chief Financial Officer Daniel Marino admitted they lied about the company’s profits and set up a fake accounting firm to falsify audits. The $20.6 million award represents the money Bayou deposited into its accounts at Goldman, said attorney Ross Intelisano of Rich & Intelisano LLP, a New York firm that represents investors in securities cases. Goldman handled all of the hedge fund’s trading between 1999 and 2004, when it stopped trading altogether, he said. The fraud totaled about $250 million. The victims were mostly individuals who invested relatively modest amounts, about $300,000 to $500,000, Intelisano said. They were promised annual returns of 10 percent to 12 percent. Goldman maintained in its response in the case that the defrauded investors were “institutional and other highly sophisticated investors.” The Goldman money, when added to other funds recovered, will result in the investors getting back a total of about half of what they lost, according to Intelisano. The case, heard by the FINRA panel, centered on the Bayou investors’ claim that Goldman either knew or should have known of the deception, because it had marketing materials claiming consistent investment gains as well as account records showing losses. “They should have done an investigation,” said Intelisano. “They would have discovered, at least, that there was something wrong.” Goldman, in its response in the case, maintained it never controlled the funds in question or offered investment advice to Bayou, but merely processed the trades made by Bayou. The investment bank said it did not know of the fraud, and was not required by law to investigate its accountholders. “We are disappointed with the award and are considering our options,” said Goldman spokesman Ed Canaday. Arbitration cases are rarely overturned, however. Intelisano maintains that the award will encourage other brokers and clearing houses to act if there is an indication their clients engage in questionable activity. “I don’t think that this is the last time that someone’s going to steal money at a hedge fund,” he said. “Now the firms that clear all those trades will have to pay more attention.” Israel and Marino pleaded guilty in 2005 to conspiracy, investment adviser fraud and mail fraud. Israel was sentenced to 20 years in jail for his role in the scheme, then staged his own suicide in 2008 in an attempt to avoid serving the time. He turned himself after a month on the lam.

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BP Based Spill Plans On Outdated Government Models

June 23, 2010

BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one. The government models, which have not been updated since 2004, assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models wrong.

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BP Based Spill Plans On Outdated Government Models

June 23, 2010

BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one. The government models, which have not been updated since 2004, assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models wrong.

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AIG Executives Won’t Face Criminal Charges, Lawyers Say

May 22, 2010

The Justice Department has decided not to file criminal charges against the former head of a division at American International Group Inc. whose dealings in mortgage-related securities nearly bankrupted the company and led to a controversial government bailout, according to lawyers involved in the cases. The decision appears to bring an end to the criminal investigation of AIG, but a Securities and Exchange Commission probe into AIG and the dealings of its London-based Financial Products subsidiary is continuing and could lead to a civil securities fraud case. Lawyers representing Joseph Cassano, who formerly ran AIG’s Financial Products unit, and Andrew Forster, who worked for Cassano, said they were told by federal prosecutors late Friday that no criminal charges would be filed. A person familiar with the government’s criminal investigation of AIG confirmed that charges wouldn’t be brought. The person was not authorized to speak publicly on the matter and spoke on condition of anonymity. The Justice Department declined comment Saturday. SEC investigators have been involved in the case from the start, but it is unclear when a decision would be made on a civil fraud case. Federal prosecutors were investigating AIG’s Financial Products unit, which dealt in financial contracts called credit default swaps that helped sink AIG in September 2008, leading to a taxpayer-funded bailout. The credit default swaps AIG sold were insurance-like guarantees on mortgage securities that wound up forcing AIG to pay out billions of dollars after the housing market went bust. Investigators were looking into whether Financial Products officials tried to deceive investors and AIG’s auditors, PricewaterhouseCoopers, by misstating the accounting value of a credit default swap portfolio. When AIG posted a loss for the fourth quarter of 2007, it pinned the blame on an $11 billion writedown related to the credit default swaps held by its Financial Products group. If AIG couldn’t make good on its promise to pay off the contracts, many of which were held by major banks, regulators feared the consequences would pose a threat to the whole U.S. financial system. That led the government to go ahead with the $180 billion bailout. Cassano’s attorneys, F. Joseph Warin and Jim Walden, said in a statement that the two-year federal investigation was intense and difficult. “The results are wholly appropriate in light of our client’s factual innocence,” said the statement, which lauded federal agents and prosecutors for following the facts to end the case. “This result was the product of two things: An innocent client and fair prosecutors and agents. The system worked,” the statement said. Forster’s attorneys, David Brodsky and Richard Owens, said in a statement that they knew it would have been easy for federal prosecutors to win a grand jury indictment, but praised them for listening to their client’s case. “We knew the prosecutors were smart, fair and open-minded and that, given a full opportunity to present all the evidence, we could convince them that our client acted at all times in good faith. In the end, the facts were stronger than the emotions surrounding AIG’s problems,” the statement said. Cassano left AIG in 2008, shortly after the $11 billion loss was reported. Forster is still employed by the company. An AIG spokesman did not return a telephone message left Saturday. The AIG bailout has drawn much public ire, largely because the company paid employees $165 million in retention bonuses after the company nearly failed and had to be bailed out by the government. Nearly two years after a meltdown in the market for subprime mortgage securities cascaded into the worst financial crisis in the U.S. since the 1930s, prosecutors have had little luck bringing criminal cases against top financial executives. Last November two executives at Bear Stearns who ran hedge funds that collapsed after betting on the subprime mortgage market were acquitted of charges that they lied to investors. ___ Associated Press Writer Pete Yost contributed to this story.

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TiVo Plunges as Patent Victory Against Echostar Is Reconsidered by Court

May 14, 2010

By Susan Decker and Amy Thomson May 14 (Bloomberg) — TiVo Inc. fell 42 percent in Nasdaq trading after an appeals court said it would reconsider the company’s legal victory against Dish Network Corp. and EchoStar Corp. for infringing a digital-video recording services patent. The court said today all active judges will take a second look at a panel’s March 4 finding that Dish and EchoStar were violating the patent, even after claiming they had altered their technology to avoid infringement. TiVo, based in Alviso, California, argued the changes weren’t sufficient. TiVo, a pioneer of digital-video recording, said it’s disappointed in the decision to draw out the case, which began with a lawsuit in 2004 against Dish and EchoStar when those two were a single satellite-television and equipment company. TiVo shares had more than doubled in the 12 months before today as investors bet the litigation would favor the company. “Many investors had been hoping for a resolution to this case that has been going on for many years now,” said Mark Harding an analyst with New York-based Maxim Group, who rates TiVo a “buy” and doesn’t own shares. It’s “more of a waiting game than anything now.” TiVo was down $7.21, or 42 percent, to $10.18 at 2:50 p.m. New York time in Nasdaq Stock Market trading after touching $10.05 earlier for its biggest one-day percentage drop since the company first sold shares to the public in September 1999. Dish, the second-biggest U.S. satellite-television provider, rose 93 cents, or 4.2 percent, to $22.89 after climbing to as high as $24.16. EchoStar rose 1 cent to $20.48. Judicial Error The U.S. Court of Appeals for the Federal Circuit set a schedule of up to four months for the submission of written arguments. It didn’t say when the case would be heard. “We believe the issues that will be considered by the full court on rehearing will have a profound impact on innovation in the United States for years to come,” Englewood, Colorado-based Dish and EchoStar said in a joint statement. The Federal Circuit, which specializes in patent law, will consider whether the judge in the case erred in not giving Dish a trial to determine if changes made to the Dish software effectively worked around the TiVo patent. The 2-1 panel in March said a hearing was adequate. The full appeals court also plans to hear arguments on the standard of proof in such cases. “We are disappointed that we do not yet have finality in this case despite years of litigation,” Krista Wierzbicki , a TiVo spokeswoman, said in an e-mail. “We remain confident that the Federal Circuit’s ruling in our favor will be reaffirmed.” Seeking ‘Full Victory’ TiVo is seeking a court order that would halt Dish’s DVR service and force the satellite-TV company into paying licensing fees. Dish Chief Executive Officer Charles Ergen has told a court it would cost the company “several hundred million dollars” a month to shut down its service. “While many people believe that today’s decision may result in a faster negotiation between Dish and TiVo over a licensing deal, we do not agree,” said Marci Ryvicker , an analyst with Wells Fargo Securities LLC in New York. “We feel that today’s decision only emboldens Charlie Ergen to run the legal proceedings to the gamut, until he gets a full victory.” The order saying the case would be heard by the entire court was posted on the Federal Circuit’s website more than 10 minutes before the court usually announces its opinions. TiVo won its trial in 2006 that claimed Dish infringed its patent for so-called “time warp” technology that lets users record a TV program and play it back at the same time. The verdict was upheld on appeal, as was an order that Dish stop providing its DVR service. Dish continued to provide the service, saying it made alterations to bypass TiVo’s invention. $400 Million U.S. District Judge David Folsom in Marshall, Texas, sided with TiVo in June, again ordering Dish and EchoStar to shut down the DVR service and citing the companies with contempt. The Federal Circuit later said it would allow Dish’s customers with digital-video recorders to continue using the service while the company appealed Folsom’s ruling. That stay remains in effect, and Dish has asked Folsom to approve a new design of the service. TiVo said it will be entitled to about $300 million in damages and contempt sanctions through July 1, 2009, and it will seek additional cash for continued infringement after that date. That’s in addition to $100 million Dish paid TiVo after the original appeals court ruling. TiVo is also counting on a legal victory against Dish to expand distribution on pay-TV services. The company, which reported $237.6 million in revenue in its past fiscal year, needs new agreements as subscribers drop. Total TiVo subscriptions fell 22 percent to 2.61 million from 3.34 million a year ago, TiVo said in March. DirecTV, AT&T, Microsoft The suit originally was against EchoStar Communications Inc., which oversaw digital set-top box manufacturing and satellite services businesses, and ran the Dish TV network. The businesses split into EchoStar and Dish Network in January 2008. DirecTV Group Inc. , the largest U.S. satellite-TV provider, has an agreement with TiVo for use of its DVR service. The patent in the Dish case also is the subject of lawsuits TiVo filed against AT&T Inc. and Verizon Communications Inc., the telephone companies that have expanded into television and Internet offerings, and in a patent dispute with Microsoft Corp. The appeal is TiVo v. EchoStar, 2009-1374, U.S. Court of Appeals for the Federal Circuit (Washington). The lower-court case is TiVo Inc. v. EchoStar Communications Corp., 04-cv-01, U.S. District Court, Eastern District of Texas (Marshall). To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net ; Amy Thomson in New York at athomson6@bloomberg.net .

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Rajaratnam Sued Partner for Leaving Him Out of Venture-Capital Transaction

April 27, 2010

By David Glovin April 27 (Bloomberg) — Nine years before his indictment for using confidential tips to trade stocks, Raj Rajaratnam , a co-founder of hedge fund firm Galleon Group LLC, sued a partner for leaving him out of the loop on a deal that may have made him millions of dollars. In September 2000, Rajaratnam filed a fraud lawsuit against the founder of a Silicon Valley venture capital firm in which he invested, TeleSoft Partners LP. In the complaint, Rajaratnam claimed Arjun Gupta , TeleSoft’s founder, and Prabhu Goel, a member of its advisory board, deprived him of an investment opportunity by concealing news of a 1999 transaction. The two men engaged in “blatant self-dealing” and sought to “deprive plaintiffs and other limited partners of the opportunity to share in this investment,” Rajaratnam and Galleon co-founder Gary Rosenbach alleged in their complaint in Manhattan federal court. Rajaratnam, who faces federal insider trading charges in the biggest such scheme ever alleged at a hedge fund, may have to answer questions about the lawsuit should he testify at his own trial in October. On cross-examination, prosecutors may seek to use details from the litigation to show his “thirst for information,” said Jacob Frenkel , a former federal prosecutor now in private practice in Potomac, Maryland. “For someone to bring such a claim suggests that they were prepared to pursue aggressively access to information, and had certain expectations about information,” Frenkel said of the 2000 suit, which settled the next year on confidential terms. U.S. Attorney Jim McCarthy, a spokesman for Rajaratnam, and Yusill Scribner, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment. Gupta and Goel didn’t return calls seeking comment. Rosenbach said in an interview that Rajaratnam handled the TeleSoft suit, which he doesn’t recall. “He must have felt he had an injustice done against him,” Rosenbach said. Rajaratnam, 52, is the central figure in a wide-ranging insider trading probe that has led to charges against 21 people, including 11 who have pleaded guilty. Prosecutors said Rajaratnam used secret tips from hedge fund executives, corporate officials and other insiders to earn millions of dollars in illegal stock trades. He denies the charges. The U.S. Securities and Exchange Commission is probing whether Rajat Gupta , who in 2006 became a Goldman Sachs Group Inc. board member, leaked confidential information to Rajaratnam about a $5 million investment in the bank by Warren Buffett’s Berkshire Hathaway Inc. in 2008, according to a person familiar with the Galleon case. Rajat Gupta isn’t accused of wrongdoing. His spokesman, Scot Hoffman, declined to comment. 60 Limited Partners According to court papers in the TeleSoft case, Rajaratnam and Rosenbach were among some 60 limited partners investing in the Foster City, California-based company. They paid $500,000 for a 2.1 percent stake in 1997. Another limited partner was the Rajat Gupta family trust, according to court papers. In April 1999, another TeleSoft limited partner, TIG Reinsurance Co., moved to withdraw its $10 million investment, according to the suit. Goel and Arjun Gupta sought to buy $2.5 million of TIG’s stake for themselves and sell the remaining interest to favored insiders and institutions, Rajaratnam alleged in his complaint. Goel and Arjun Gupta sent letters that August asking the limited partners to consent to the transaction and reporting “no significant events” that would change the value of TeleSoft’s portfolio, the suit said. Crucial Information Omitted from the letters was crucial information, Rajaratnam claimed. Weeks before, Cerent Corp., in which TeleSoft held a 2 percent stake, had announced plans to sell shares to the public and that Dell Inc. founder Michael Dell would make a sizable investment in Cerent, according to the complaint. Rajaratnam said Goel and Arjun Gupta withheld this information so they could take advantage of TIG’s interest. When, on Aug. 26, 1999, Cisco Systems Inc. announced that it would instead buy Cerent for almost $7 billion, “TeleSoft’s original $3.6 million investment instantly became worth more than $145 million,” Rajaratnam and Rosenbach said. “The limited partnership interests that defendants had earmarked for themselves increased in value overnight by at least tenfold.” Rajaratnam and Rosenbach said that when they tried to block the sale of TIG’s stake after learning of the Cisco deal, Goel and Arjun Gupta “completed the transactions, gaining instant profits for themselves by having deprived plaintiffs of this investment opportunity.” Goel denied wrongdoing in the case, saying he had no communications with Rajaratnam except to be “threatened” with litigation by the Galleon Group co-founder, according to filings in the case. Arjun Gupta didn’t file court papers before the case settled five months later. The case is Rajaratnam v. Arjun Gupta, 00-cv-06733, U.S. District Court, Southern District of New York (Manhattan). To contact the reporter on this story: David Glovin in New York federal court at glovin@bloomberg.net .

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Goldman Sachs Should Cut Losses in SEC Standoff

April 23, 2010

By Joshua Gallu and David Scheer April 23 (Bloomberg) — Goldman Sachs Group Inc. may be better off cutting its losses instead of fighting what it terms “unfounded” fraud claims, say professors of securities law who have examined the U.S. Securities and Exchange Commission’s lawsuit against the bank. The most profitable firm in Wall Street history will probably lose what is typically the first hurdle in court, a motion to throw out the April 16 suit because it lacks legal merit, the professors said in interviews this week. After that, Goldman Sachs’s risks will mount and its negotiating position will weaken, they said. “There’s a very low probability that Goldman could get the case dismissed,” said Thomas Hazen of the University of North Carolina at Chapel Hill, whose books include a two-volume treatise on broker-dealer law. “Every pretrial motion the SEC wins, Goldman gets one step closer to losing.” Goldman Sachs is the first major Wall Street firm accused by regulators of fraud connected to the collapse of the subprime mortgage market. The SEC’s allegation that Goldman Sachs defrauded investors sparked a 13 percent, one-day decline in its shares. The New York-based firm, led by Chief Executive Officer Lloyd Blankfein , 55, said it will vigorously contest the claims. It must weigh the risks of a drawn-out legal battle against the benefits of a more immediate resolution. “We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact,” the bank said after the complaint was filed. Lucas van Praag , a Goldman Sachs spokesman, declined to comment yesterday on the likelihood of getting the case dismissed. Senate Hearing Blankfein and other executives at the bank are scheduled to testify at a Senate hearing next week along with Fabrice Tourre , the Goldman Sachs banker who was also sued by the SEC. The Permanent Subcommittee on Investigations will explore investment banks’ role in the financial crisis at the April 27 hearing. Blankfein yesterday attended a speech by President Obama in New York City pushing for financial regulatory reform, as Congress weighs legislation that could crimp profits for Goldman Sachs and the biggest U.S. banks. The legislation may come to the Senate floor as early as next week. Even if top managers are certain they’re right on the merits of the case, Goldman Sachs should probably settle, said senior executives at three of the firm’s rivals. The executives, speaking anonymously because they wouldn’t comment publicly on a competitor, said Goldman Sachs would be better off by deciding to settle the suit, cut its losses, and focus on repairing the damage to the firm’s reputation. Paulson’s Pick Two of the executives said they also believe Goldman Sachs may have to change senior management to give the appearance that the firm is changing the way it does business. The SEC’s case revolves around whether the firm should have told investors that hedge fund Paulson & Co. helped pick the underlying securities in a collateralized debt obligation — and then bet against it. Paulson wasn’t accused of wrongdoing. That’s too nuanced a judgment to make on the limited evidence available so far, making it unlikely the case will be dismissed, said Peter Henning , a former SEC attorney who teaches at Wayne State University Law School in Detroit. U.S. District Judge Barbara Jones , who was assigned the case and also presided over the case of former WorldCom Inc. CEO Bernard Ebbers , won’t dismiss it because materiality is what’s at issue, said Columbia University’s John Coffee . Lawsuit Fodder? If the SEC’s case survives a dismissal motion, the case would probably proceed to discovery, when the agency may seek additional testimony or information from the firm. That process could provide fodder for private lawsuits, additional allegations from regulators, or media attention that would further tarnish the firm’s image, according to George Cohen, a corporate law professor at the University of Virginia School of Law, and Lisa Casey, who teaches securities law at the University of Notre Dame in Indiana. “The evidence and rumors would be difficult to contain,” Casey said. “The market could react any time more information leaks out to the press.” Goldman Sachs’s shares have slipped 1 percent this week after the April 16 tumble. The stock rose $1.31 to $160.35 as of 9:35 a.m. in New York Stock Exchange composite trading. Few professors were willing to predict which side would win in a trial, saying the case will depend on evidence and testimony that isn’t yet public. If weaknesses emerge in the SEC’s case, Goldman Sachs may decide to press on. Reputational Risks The reputational stakes are so high that Goldman Sachs may feel pressure to keep fighting, said Onnig Dombalagian , a former attorney fellow at the SEC who teaches at Tulane University Law School in New Orleans. “For Goldman not to stand behind its deals would be problematic for the firm,” he said. If Goldman Sachs settles or loses at trial, “people are going to ask, ‘Am I one of the clients who Goldman does deals for, or am I one of the clients Goldman does deals against?’” Dombalagian said. “There’s the saying that if you don’t know who the mark at the table is, you’re probably the mark.” Tamar Frankel , a corporate governance professor at Boston University, said a jury may be hostile to Goldman Sachs. “If many of the jurors have lost chunks of their savings in the crisis, the weight will be for the SEC,” Frankel said. The case is Securities and Exchange Commission v. Goldman Sachs, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan). To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net ; David Scheer in New York at dscheer@bloomberg.net .

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Goldman Gambles as Lawyers Say Bank Should Cut Its Losses, Settle With SEC

April 23, 2010

By Joshua Gallu and David Scheer April 23 (Bloomberg) — Goldman Sachs Group Inc. may be better off cutting its losses instead of fighting what it terms “unfounded” fraud claims, say professors of securities law who have examined the U.S. Securities and Exchange Commission’s lawsuit against the bank. The most profitable firm in Wall Street history will probably lose what is typically the first hurdle in court, a motion to throw out the April 16 suit because it lacks legal merit, the professors said in interviews this week. After that, Goldman Sachs’s risks will mount and its negotiating position will weaken, they said. “There’s a very low probability that Goldman could get the case dismissed,” said Thomas Hazen of the University of North Carolina at Chapel Hill, whose books include a two-volume treatise on broker-dealer law. “Every pretrial motion the SEC wins, Goldman gets one step closer to losing.” Goldman Sachs is the first major Wall Street firm accused by regulators of fraud connected to the collapse of the subprime mortgage market. The SEC’s allegation that Goldman Sachs defrauded investors sparked a 13 percent, one-day decline in its shares. The New York-based firm, led by Chief Executive Officer Lloyd Blankfein , 55, said it will vigorously contest the claims. It must weigh the risks of a drawn-out legal battle against the benefits of a more immediate resolution. “We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact,” the bank said after the complaint was filed. Lucas van Praag , a Goldman Sachs spokesman, declined to comment yesterday on the likelihood of getting the case dismissed. Senate Hearing Blankfein and other executives at the bank are scheduled to testify at a Senate hearing next week along with Fabrice Tourre , the Goldman Sachs banker who was also sued by the SEC. The Permanent Subcommittee on Investigations will explore investment banks’ role in the financial crisis at the April 27 hearing. Blankfein yesterday attended a speech by President Obama in New York City pushing for financial regulatory reform, as Congress weighs legislation that could crimp profits for Goldman Sachs and the biggest U.S. banks. The legislation may come to the Senate floor as early as next week. Even if top managers are certain they’re right on the merits of the case, Goldman Sachs should probably settle, said senior executives at three of the firm’s rivals. The executives, speaking anonymously because they wouldn’t comment publicly on a competitor, said Goldman Sachs would be better off by deciding to settle the suit, cut its losses, and focus on repairing the damage to the firm’s reputation. Paulson’s Pick Two of the executives said they also believe Goldman Sachs may have to change senior management to give the appearance that the firm is changing the way it does business. The SEC’s case revolves around whether the firm should have told investors that hedge fund Paulson & Co. helped pick the underlying securities in a collateralized debt obligation — and then bet against it. Paulson wasn’t accused of wrongdoing. That’s too nuanced a judgment to make on the limited evidence available so far, making it unlikely the case will be dismissed, said Peter Henning , a former SEC attorney who teaches at Wayne State University Law School in Detroit. U.S. District Judge Barbara Jones , who was assigned the case and also presided over the case of former WorldCom Inc. CEO Bernard Ebbers , won’t dismiss it because materiality is what’s at issue, said Columbia University’s John Coffee . Lawsuit Fodder? If the SEC’s case survives a dismissal motion, the case would probably proceed to discovery, when the agency may seek additional testimony or information from the firm. That process could provide fodder for private lawsuits, additional allegations from regulators, or media attention that would further tarnish the firm’s image, according to George Cohen, a corporate law professor at the University of Virginia School of Law, and Lisa Casey, who teaches securities law at the University of Notre Dame in Indiana. “The evidence and rumors would be difficult to contain,” Casey said. “The market could react any time more information leaks out to the press.” Goldman Sachs’s shares have slipped 1 percent this week after the April 16 tumble. The stock closed at $159.05 yesterday, down 5.8 percent this year. Few professors were willing to predict which side would win in a trial, saying the case will depend on evidence and testimony that isn’t yet public. If weaknesses emerge in the SEC’s case, Goldman Sachs may decide to press on. Reputational Risks The reputational stakes are so high that Goldman Sachs may feel pressure to keep fighting, said Onnig Dombalagian , a former attorney fellow at the SEC who teaches at Tulane University Law School in New Orleans. “For Goldman not to stand behind its deals would be problematic for the firm,” he said. If Goldman Sachs settles or loses at trial, “people are going to ask, ‘Am I one of the clients who Goldman does deals for, or am I one of the clients Goldman does deals against?’” Dombalagian said. “There’s the saying that if you don’t know who the mark at the table is, you’re probably the mark.” Tamar Frankel , a corporate governance professor at Boston University, said a jury may be hostile to Goldman Sachs. “If many of the jurors have lost chunks of their savings in the crisis, the weight will be for the SEC,” Frankel said. The case is Securities and Exchange Commission v. Goldman Sachs, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan). To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net ; David Scheer in New York at dscheer@bloomberg.net .

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Goldman Sachs Gambles Reputation in Standoff With SEC Over Claims of Fraud

April 22, 2010

By Joshua Gallu and David Scheer April 23 (Bloomberg) — Goldman Sachs Group Inc. may be better off cutting its losses instead of fighting what it terms “unfounded” fraud claims, say professors of securities law who have examined the U.S. Securities and Exchange Commission’s lawsuit against the bank. The most profitable firm in Wall Street history will probably lose what is typically the first hurdle in court, a motion to throw out the April 16 suit because it lacks legal merit, the professors said in interviews this week. After that, Goldman Sachs’s risks will mount and its negotiating position will weaken, they said. “There’s a very low probability that Goldman could get the case dismissed,” said Thomas Hazen of the University of North Carolina at Chapel Hill, whose books include a two-volume treatise on broker-dealer law. “Every pretrial motion the SEC wins, Goldman gets one step closer to losing.” Goldman Sachs is the first major Wall Street firm accused by regulators of fraud connected to the collapse of the subprime mortgage market. The SEC’s allegation that Goldman Sachs defrauded investors sparked a 13 percent, one-day decline in its shares. The New York-based firm, led by Chief Executive Officer Lloyd Blankfein , 55, said it will vigorously contest the claims. It must weigh the risks of a drawn-out legal battle against the benefits of a more immediate resolution. “We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact,” the bank said after the complaint was filed. Lucas van Praag , a Goldman Sachs spokesman, declined to comment yesterday on the likelihood of getting the case dismissed. Senate Hearing Blankfein and other executives at the bank are scheduled to testify at a Senate hearing next week along with Fabrice Tourre , the Goldman Sachs banker who was also sued by the SEC. The Permanent Subcommittee on Investigations will explore investment banks’ role in the financial crisis at the April 27 hearing. Blankfein yesterday attended a speech by President Obama in New York City pushing for financial regulatory reform, as Congress weighs legislation that could crimp profits for Goldman Sachs and the biggest U.S. banks. The legislation may come to the Senate floor as early as next week. Even if top managers are certain they’re right on the merits of the case, Goldman Sachs should probably settle, said senior executives at three of the firm’s rivals. The executives, speaking anonymously because they wouldn’t comment publicly on a competitor, said Goldman Sachs would be better off by deciding to settle the suit, cut its losses, and focus on repairing the damage to the firm’s reputation. Paulson’s Pick Two of the executives said they also believe Goldman Sachs may have to change senior management to give the appearance that the firm is changing the way it does business. The SEC’s case revolves around whether the firm should have told investors that hedge fund Paulson & Co. helped pick the underlying securities in a collateralized debt obligation — and then bet against it. Paulson wasn’t accused of wrongdoing. That’s too nuanced a judgment to make on the limited evidence available so far, making it unlikely the case will be dismissed, said Peter Henning , a former SEC attorney who teaches at Wayne State University Law School in Detroit. U.S. District Judge Barbara Jones , who was assigned the case and also presided over the case of former WorldCom Inc. CEO Bernard Ebbers , won’t dismiss it because materiality is what’s at issue, said Columbia University’s John Coffee . Lawsuit Fodder? If the SEC’s case survives a dismissal motion, the case would probably proceed to discovery, when the agency may seek additional testimony or information from the firm. That process could provide fodder for private lawsuits, additional allegations from regulators, or media attention that would further tarnish the firm’s image, according to George Cohen, a corporate law professor at the University of Virginia School of Law, and Lisa Casey, who teaches securities law at the University of Notre Dame in Indiana. “The evidence and rumors would be difficult to contain,” Casey said. “The market could react any time more information leaks out to the press.” Goldman Sachs’s shares have slipped 1 percent this week after the April 16 tumble. The stock closed at $159.05 yesterday, down 5.8 percent this year. Few professors were willing to predict which side would win in a trial, saying the case will depend on evidence and testimony that isn’t yet public. If weaknesses emerge in the SEC’s case, Goldman Sachs may decide to press on. Reputational Risks The reputational stakes are so high that Goldman Sachs may feel pressure to keep fighting, said Onnig Dombalagian , a former attorney fellow at the SEC who teaches at Tulane University Law School in New Orleans. “For Goldman not to stand behind its deals would be problematic for the firm,” he said. If Goldman Sachs settles or loses at trial, “people are going to ask, ‘Am I one of the clients who Goldman does deals for, or am I one of the clients Goldman does deals against?’” Dombalagian said. “There’s the saying that if you don’t know who the mark at the table is, you’re probably the mark.” Tamar Frankel , a corporate governance professor at Boston University, said a jury may be hostile to Goldman Sachs. “If many of the jurors have lost chunks of their savings in the crisis, the weight will be for the SEC,” Frankel said. The case is Securities and Exchange Commission v. Goldman Sachs, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan). To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net ; David Scheer in New York at dscheer@bloomberg.net .

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Goldman Sachs CDO Lawsuit Split SEC’s Commissioners 3-2 Along Party Lines

April 20, 2010

By Jesse Westbrook April 20 (Bloomberg) — The U.S. Securities and Exchange Commission split 3-2 along party lines to approve an enforcement case against Goldman Sachs Group Inc. , according to two people with knowledge of the vote. SEC Chairman Mary Schapiro sided with Democrats Luis Aguilar and Elisse Walter to approve the case filed on April 16, said the people, who declined to be identified because the vote wasn’t public. Republican commissioners Kathleen Casey and Troy Paredes voted against suing, the people said yesterday. Schapiro, an independent appointed by Democratic President Barack Obama , cast the deciding vote in a high-profile case for the second time this year. In February, she sided with Democrats in a $150 million settlement with Bank of America Corp. tied to its takeover of Merrill Lynch & Co. “She’s not worried about consensus because ultimately, this case is going to be decided by a jury trial,” said Peter Henning , a former federal prosecutor and SEC attorney who teaches at Wayne State University Law School in Detroit. “It might help Goldman a little bit in the public-relations battle to show that there is division.” The SEC accused Goldman Sachs, the most profitable firm in Wall Street history, of creating and selling collateralized debt obligations tied to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities. Goldman Sachs also didn’t disclose to investors that Paulson was betting against the securities, the SEC said. SEC spokesmen John Nester declined to comment. Public Outrage Goldman Sachs said in a statement last week that the SEC’s allegations are “completely unfounded in law and fact.” The company, led by Chief Executive Officer Lloyd Blankfein , 55, said it will “vigorously” contest the case and “defend the firm and its reputation.” Shares of Goldman Sachs plunged 13 percent on April 16 after the SEC announced its case. The stock rose $2.62, or 1.6 percent, to $163.32 at 4 p.m. in New York Stock Exchange composite trading. Schapiro, 55, has bucked consensus in approving enforcement cases and new regulations. In February, she joined Aguilar and Walter in 3-2 votes for rules to restrict bearish stock bets and to encourage companies to disclose how climate change may alter financial results. The vote on short-sale restrictions prompted Erik Sirri , a former head of the SEC’s division of trading and markets under Schapiro, to say the agency made a political decision rather than one based on market data. Sought Consensus Schapiro’s predecessor, Christopher Cox , tried to seek consensus on SEC actions, triggering criticism from investors that he wouldn’t take on contentious cases or rules. Cox stepped down as SEC chairman in January 2009. Goldman Sachs, which reports first-quarter earnings today, was warned nine months ago by the SEC that agency investigators wanted to bring a case, people with direct knowledge of the talks said. The company made counter-arguments in response to the so-called Wells notice before disclosing to investors in March that it was cooperating with regulators. The SEC didn’t tell the company that it planned to file its suit on April 16, which Goldman Sachs interpreted as a sign the agency has become unusually adversarial, according to a person close to the firm. To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net .

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Fortune’s Stanley Bing: In God We Trust (All others pay cash)

April 5, 2010

I flew into Los Angeles from Indianapolis yesterday. You guys must think I’m on the plane all the time, and to some extent that’s true. In general, I’m not complaining as long as things go smoothly, which most of the time they do. In this case, it was a little bumpy during our layover in Dallas. American Airlines, which is hubbed there, couldn’t find a crew to clean the “new equipment” that had been assigned to our flight. That’s really frustrating. “We’d be ready to board,” said the announcement, “But we have a 767 instead of a 757 and they haven’t assigned a cleaning crew yet and so we’re not authorized to let you on the plane.” Several hundred people groaned. My phone rang. It was the Executive Platinum desk giving me a courtesy call to inform me of what I already knew. “You want to provide a real service here?” I politely asked the nice lady at the other end of the line. She seemed flummoxed. Her perception of her job, I could tell, was limited to calling people to tell them information that they probably already knew, end of story. “Okay?” she replied. I could tell that she was nervous. Suppose I asked her to come over and tie my shoe? “Why don’t you call your supervisors and tell them to send somebody to clean our plane?” I said with tremendous gentleness. “Then we could leave and you wouldn’t have to make any more phone calls.” I’m not claiming any credit here, but I will note that the cleaning crew showed up five minutes later and we left only 20 minutes late. While we were circling LA, the pilot got on to make a TMI Announcement. You know what that is. Sam Elliot’s voice gets on the horn to tell you something you really don’t want to know, thus providing Too Much Information. In this case, it was sort of disquieting. “There was some kind of earthquake in LA and we’re going to circle for a while to make sure that the runways are okay to land on,” he said in his upbeat Texas twang. After a while he came back. “Flight attendants prepare for landing,” he said. And so we landed. Later it turned out that there was a 6.3 level earthquake in the area, an echo of a larger quake that had taken place in nearby Mexico. So the runways didn’t melt or explode, and everything was basically okay. It occurs to me this morning how many assumptions we make that enable us to keep on going without, you know, screaming, or drinking at breakfast. We assume, in spite of all evidence to the contrary, that California will not slide into the ocean, as the mystics and statistics say it will. We assume that the planes, trains and rented automobiles that we enter will be relatively clean, and that we will not find somebody’s half-eaten peanut butter and jelly sandwich tucked into a seat pocket. We assume that certain efforts to stablize the world will make it possible for our buildings to remain standing. We assume that hedge fund managers who make $4 billion a year in personal income are not a symptom of a horrendous bubbling tumor eating away at the cell structure of our economy. We assume that because the economy is coming back a bit that it will continue to do so. At least I do. Some of us assume that the market has sufficient brains and mechanisms to correct itself. Of course, I don’t. And we assume that debt is still a really good way to buy things we can’t afford. We need our assumptions. Without them, we might have consider the possibility that one day, while we’re up in the air, we won’t have a place to land, and might have to be diverted to hell, or Bakersfield, whichever is closer.

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Case-Shiller Index January 2010: Home Prices Up On California’s Surprising Rebound

March 30, 2010

NEW YORK — A surprisingly strong rebound in California’s real estate market helped lift a key home price index for the eighth month in a row. That’s good news for people who plan to sell their homes this spring. Prices are now up almost 4 percent from the bottom in May 2009, but still almost 30 percent below the May 2006 peak. Prices rose 0.3 percent from December to January on a seasonally adjusted basis, according to the Standard & Poor’s/Case-Shiller 20-city home price index released Tuesday. Prices increased in 12 cities in the index. The biggest monthly gain was in Los Angeles, where prices rose 1.8 percent from December. And real estate agents say there’s a distinct sense the worst of the downturn is over. Buyers are “seeing that prices are creeping up,” said Tony Middleton, a real estate agent with ZIP Realty who concentrates on the San Fernando Valley. “They’re losing bids on homes and they have to bid again.” Prices in San Diego, meanwhile, rose by almost 0.9 percent. Phoenix had the third-largest gain at 0.8 percent. Compared with the same month last year, the 20-city index was off just 0.7 percent from last year at a reading of 146.32. That was the smallest decline in almost three years and in line with analysts’ expectations, according to Thomson Reuters. Rising home prices also could boost consumer optimism. For most Americans, their home is their largest asset, so as values climb from the depths of the housing bust, homeowners feel wealthier and more comfortable spending. And, for homeowners who owe more on their mortgages than their properties are worth, rising prices rebuild equity. Consumer confidence rebounded in March after a February plunge, according to a survey released Tuesday. The Conference Board’s Consumer Confidence Index rose to 52.5 in March, recovering about half of the nearly 11 points it lost in February. Still, shoppers remain cautious and there are signs that last year’s housing rebound won’t last. Home sales sank during the winter, and government incentives that have propped up the market are ending. Another reason for the positive news is simply that the Case-Shiller index measures a three-month average of home prices. So January’s report includes November’s strong home sales. Many analysts expect that the Case-Shiller number will eventually turn downward. “It is only a matter of time before the index records a double-dip in prices,” wrote Paul Dales, U.S. economist with Capital Economics, who forecasts a 5 percent drop. The market will be tested in the second half of the year, he wrote, when a tax credit that has boosted sales is gone. The Case-Shiller index measures home price increases and decreases relative to prices in January 2000. The base reading is 100; so a reading of 150 would mean that home prices increased 50 percent since the beginning of the index.

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Swiss Court May Force UniCredit to Pay $321 Million in Communist-Era Case

March 27, 2010

By Tony Czuczka and Zoe Schneeweiss March 27 (Bloomberg) — UniCredit SpA’s Austrian unit may be forced to pay 240 million euros ($321 million) to the German government in a court case involving assets of the former East German Communist Party. The Zurich District Court of Appeal yesterday ruled in favor of the German government in a lawsuit that accuses UniCredit Bank Austria AG’s former AKB Privatbank Zuerich unit of helping to embezzle funds from companies in the former East Germany, Vienna-based Bank Austria said yesterday in a statement. The court reversed an initial ruling of the Zurich District Court, which had rejected Germany’s claim. Bank Austria, which is an intervening party in the case, will file an appeal to the Court of Cassation of the Canton of Zurich and to the Swiss Federal Supreme Court, according to the statement. The potential risk is about 128 million euros, or 240 million euros including interest as of yesterday, Bank Austria said. Court officials couldn’t be reached for comment after business hours yesterday. When the case went to court in 1994, Germany said that the bank helped launder 250 million deutsche marks ($171.5 million) that vanished from the accounts of two former East German trading companies after communism fell. Germany said that the funds were East German state assets that AKB helped shift to the Austria Communist Party in the 1990s after German reunification. Germany is being represented by Bundesanstalt fuer Vereinigungsbedingte Sonderaufgaben, the legal successor of Deutsche Treuhandanstalt, which was in charge of managing the assets of the former East Germany. To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net ; Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net .

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Deutsche Bank, JPMorgan, UBS Charged With Fraud in Milan Derivatives Sale

March 17, 2010

By Elisa Martinuzzi and Sonia Sirletti March 17 (Bloomberg) — Deutsche Bank AG , JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the City of Milan. Judge Simone Luerti scheduled the trial of the four firms, 11 bankers and two former city officials for May 6, Prosecutor Alfredo Robledo said after a hearing in Milan today. The banks allegedly misled the city on swaps that adjusted interest payments on 1.7 billion euros ($2.3 billion) of borrowings. Prosecutors across Italy are probing banks as local and national government agencies face potential losses of 2.5 billion euros on derivatives, lawyers say. The Milan probe may also affect cases as far away as the U.S., where securities firms have faced charges for price-fixing and bid-rigging in the sale of derivatives to municipalities, though not for fraud, according to former regulator Christopher “Kit” Taylor. “This case could have repercussions over here if the trial showed deliberate intent,” said Taylor, a former executive director of the Municipal Securities Rulemaking Board, the national regulator of the municipal-bond market. “What happened in Europe was the continuation of a pattern in the U.S.” UBS, JPMorgan and Deutsche Bank officials didn’t have an immediate comment. Officials at Depfa couldn’t immediately be reached. Economic Advantage Robledo alleges the London units of the four banks misled Milan on the economic advantage of a financing package that included the swaps and earned 101 million euros in hidden fees. He also claims the banks violated U.K. securities rules by failing to inform Milan in writing that for the swap deal the city was a counterparty to the lenders rather than a customer. Banks abiding by the rules of the Financial Services Authority are required to shield customers from conflicts of interest and provide them with clear and fair information that isn’t misleading. The prosecutor, who seized assets from the banks equal to their share of the alleged profit, is claiming JPMorgan charged about 45 million euros in commissions that were hidden from the municipality, while Deutsche Bank made about 25 million euros, Depfa Bank earned 21 million euros and UBS made 10 million euros, court documents show. “The thesis brought forward by the prosecutor was particularly innovative and aggressive,” said Giampiero Biancolella , an attorney specializing in financial crime who isn’t involved in the case. “The indictments prove the allegations are legitimate, though the charges don’t yet prove the banks are guilty.” Apulia Probe In another Italian investigation, magistrates in the region of Apulia are probing Bank of America Corp. and last month requested the company be stopped from doing business with the country’s municipalities for two years amid allegations it misled the municipality on derivatives linked to 870 million euros of bonds. A unit of Dexia SA is also under investigation in the same case. Separately, Nomura Holdings Inc. bankers are under investigation for alleged fraud relating to derivatives contracts sold to the Italian region of Liguria in 2004, people familiar with the case said last month. Derivatives are unregulated financial instruments linked to stocks, bonds, loans, currencies and commodities, or related to specific events such as changes in interest rates or the weather. The allegations have prompted Italian lawmakers to propose new rules restricting the use of derivatives among municipalities by boosting oversight and banning upfront payments. Italy’s Senate Finance Committee on March 11 unanimously approved a proposal on tighter rules that will be used by the finance ministry to shape regulation. Through swaps, “banks found a way to sell something that is debt without making it look like debt,” said Taylor, who advises a law firm that has sued banks on behalf of residents of Jefferson County, Alabama, which was on the brink of bankruptcy after swaps backfired. To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net ; Sonia Sirletti in Milan at ssirletti@bloomberg.net

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Marielena Hincapié: ICE and Big Business: Too Close for Comfort

February 3, 2010

Today, workers, along with immigrant and civil rights advocates, exposed evidence of a disturbing and dangerous attack on workers’ rights by the U.S. Immigration and Customs Enforcement agency (ICE). Testimony in the case David et al. v. Signal et al. has revealed that high level executives of defense contractor Signal International worked closely with ICE and the U.S. Customs and Border Patrol (CBP) to quash organizing efforts by courageous workers from India who were allegedly caught in a human trafficking ring. The case should be alarming to all workers, because an attack on the rights of any group of workers puts all workers’ rights at risk. Lured by the chance to pursue the American dream, hundreds of workers from India were recruited in 2006 to work at Signal as part of a post-Hurricane Katrina reconstruction effort. These men, welders and pipe fitters, paid fees averaging $20,000 apiece to labor recruiters, who had promised them permanent jobs and green cards. When the workers arrived in the United States, they were subjected to horrific conditions in what Signal called “man camps,” and tethered to Signal by short-sighted immigration laws. Under the current guest worker visa program, workers who enter the U.S. on temporary employment-based visas are bound to the sponsoring employer and become undocumented if they are fired or quit their job–even if they do so to escape exploitation. Refusing to suffer in silence, the workers organized a campaign to assert their rights. Signal, instead of negotiating with workers to address their issues, sought guidance from ICE on how to deport workers who were causing “unrest.” An ICE official advised Signal to “take [the Indians] out of line on their way to work, get their personal belongings, get them in a van…and send them back to India.” According to the workers, Signal held a pre-dawn raid against its employees in March 2007. The deposition transcripts indicate that for the next two years, ICE met repeatedly with Signal and developed a plan for Signal to share information with ICE so that ICE could “send a message to the remaining workers that it is not in their best interests to try and ‘push’ the system.” In 2008, former Signal workers showed their faith in the American legal system by writing to the Department of Justice, stating that they had been victims of human trafficking and labor abuses, and asking the department to conduct a criminal investigation. Our justice system is based on the belief that workers who allege abuse will receive a fair and impartial investigation. The Signal workers were denied this fundamental right. The evidence of collusion between ICE and Signal shows that ICE has a flagrant disregard for the rights of immigrant workers, which casts serious doubt on the agency’s ability to effectively enforce federal immigration law. As a result of ICE’s interference, the workers’ ability to remain in the U.S. even long enough to plead their cases is in jeopardy. The Obama administration must act swiftly to undo the harms caused by ICE under the previous administration and ensure that the current investigations proceed with full impartiality. The immigration and border patrol agents implicated in the case should be held accountable for their actions and violations. The Department of Homeland Security must sign a strong Memorandum of Understanding with the Department of Labor, Equal Employment Opportunity Commission, and other labor and employment agencies to prevent ICE and CBP from interfering in labor disputes. Finally, Congress should hold oversight hearings to determine whether the disturbing evidence obtained in this lawsuit reflect an isolated case, or whether this is one of many examples of ICE interference in labor disputes. Congress must do more than simply wag its finger at ICE. Elected officials should hold the agency accountable for its actions and put protections in place to ensure that this abuse of authority does not happen again. Protecting labor laws for the most vulnerable workers keeps standards high for all workers. America deserves a justice system that is free and fair for all of its residents, not only a select few.

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Polanski Must Come to U.S. to Be Sentenced in 1977 Sex Case, Judge Rules

January 23, 2010

By Edvard Pettersson Jan. 23 (Bloomberg) — Film director Roman Polanski will have to return to California to be sentenced, more than 32 years after he pleaded guilty to having sex with a 13-year-old girl, a judge said. California Superior Court Judge Peter Espinoza , at a hearing yesterday in Los Angeles, denied Polanski’s request to be sentenced in absentia. The judge, who last year denied Polanski’s request to dismiss the case for alleged judicial and prosecutorial misconduct, said that as a fugitive, Polanski must surrender to the court before he can get a hearing. Polanski’s lawyers had sought a sentencing hearing, without the director present, to provide evidence that the original judge in 1977 had agreed not to incarcerate Polanski after he had undergone a diagnostic study at Chino State Prison. Polanski should be sentenced to the time he served in prison, which was 42 days, his lawyers said in court filings. “I do not disagree that the intended sentence was the time spent in Chino, but it was never imposed,” Espinoza said at yesterday’s hearing. Polanski, 76, is under house arrest at his Swiss ski chalet while waiting for a decision on a U.S. extradition request. The director, who fled California in 1978 before he was sentenced, was arrested at Zurich airport Sept. 26 as he arrived to collect an award at the city’s film festival. A French and Polish citizen, Polanski has been living in Paris since fleeing the U.S. His lawyers said he fled because the judge at the time reneged on the promise not to send him back to prison. Original Charges Polanski was initially charged with six felony counts on allegations he drugged and raped then 13-year-old Samantha Geimer during a photo shoot at actor Jack Nicholson’s house. He later pleaded guilty to one count of unlawful sexual conduct with a minor after the girl’s family asked prosecutors to avoid a jury trial. Yesterday, Espinoza denied a request by a lawyer representing Geimer for a hearing on alleged misconduct by the judge and a prosecutor in 1977 and 1978. Geimer joined Polanski’s request in December 2008 to have the case dismissed and has opposed the Los Angeles District Attorney’s attempt to extradite him. Lawyers for Polanski claim the judge, Laurence Rittenband, ordered Polanski in 1977 to undergo a 90-day diagnostic study and said that would constitute his entire punishment. The judge reneged on that promise, encouraged by a prosecutor not assigned to the case, after Polanski was released after only 42 days, his lawyers said. ‘Corrupt Judge’ “Mr. Polanski did not flee from justice,” Chad Hummel , one of Polanski’s lawyers said at yesterday’s hearing. “Mr. Polanski left the country because a corrupt judge threatened to sentence him a second time.” Deputy District Attorney David Walgren said at the hearing that prosecutors want a resolution to the case and that it was up to Polanski to surrender. Walgren, when asked by Hummel, didn’t say what prison term he would be seeking if Polanski returns to California. In a filing with the Swiss government, prosecutors said Polanski faces a prison sentence of as long as two years. Hummel declined to comment after the hearing. The case is People of the State of California v. Roman Polanski, A334139, California Superior Court (Los Angeles). To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net .

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Cambridge Realty Capital Processes 298 Loan Origination Requests Totaling $4.03 Billion in 2009, Chairman Davis Reports

January 22, 2010

in the mix than was the case in 2008. Privately owned since its founding in 1983 as a real estate investment banker specializing in commercial real estate properties, Cambridge today has three distinctive business units: FHA-insured HUD loans,

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Megan Carpentier: Democracy, Now Brought To You By Coke And Pepsi

January 21, 2010

The newly-activist Supreme Court ruled today in Citizens United v. Federal Election Commission that corporations in the United States have an absolute right to free speech that includes the right to run multi-million dollar advertising campaigns for or against candidates, just as Mark Green predicted after oral arguments last December. The decision overturns nearly 100 years of precedent and Congressional action against such spending on the basis of an earlier ruling that corporations are citizens (though they aren’t yet accorded the right to vote.) In an interesting twist, the actual case the Supreme Court was asked to decide had absolutely nothing to do with whether corporations were allowed to fund campaign advertisements. Rather, Citizens United asked the Supreme Court to rule that its anti-Hillary Clinton movie, creatively called “Hillary:The Movie,” was not political speech under the law and thus not subject to donor-disclosure requirements and didn’t need to end its television advertisements with disclosures that they had funded the movie. The Supreme Court categorically rejected Citizens United’s arguments, ruling that such disclosures were required for Citizens United and constitutional. How did the Supreme Court end up ruling on corporate candidate commercials over a movie made by a non-profit? They called the litigants back into court last December and asked them about it, even though the issue wasn’t part of the suit, thus making the question of corporate advertising part of the case. Apparently, the Supreme Court’s conservatives are only concerned about judicial activism when it involves actual Americans’ rights. What the Supreme Court’s decision today means is that corporations can run their own advertisements for or against political candidates, as long as they are branded by the corporations and are not coordinated with the candidates themselves. In the decision, the Court strongly hinted that they hadn’t decided to allow corporations to contribute directly to or coordinate with candidates only because they couldn’t come up with some relevant question to ask to allow them to do so–so that might not be too far off. The ruling is based on a 19th century Supreme Court footnote that says corporations are entitled to the 14th Amendment protection of equal treatment under the law, and a more recent one that accords campaign spending–money–the same status as speech. On the basis of these two rulings, the Court threw out the ban on direct corporate (and, by extension, union) spending to support candidates. The midterm election can now be brought to you by Pepsi and Coke–or any other company with the money to spend to elect candidates they think will be better for their bottom line. The Supreme Court’s conservative majority rejected arguments that spending shareholder money on political advertisements could violate the rights of shareholders; it rejected arguments that overseas investments in or by American corporations could encourage them to support candidates who don’t have only America’s interests in mind; and it rejected arguments and long-standing American sentiment that elections should be, as much as possible, influenced and decided by the people who can vote in those elections. And, in the end, it told the plaintiff exactly what the lower courts said: that the FEC was correct in its interpretation of how the law pertains to “Hillary:The Movie.” But no one–let alone Citizens United or the Supreme Court–cares about a crappy movie. They apparently only took the case to be able to throw out laws that keep corporations from spending millions–if not billions–to influence the American electoral process in the name of free speech. The only thing that might keep corporations like Exxon from spending some small percentage of its multi-billion dollar yearly profits to support a Drill-Baby-Drill candidate is the fear that some percentage of Americans might choose to boycott Mobil stations over that support. But if every oil company supports the same candidate, from whom will anyone get the gas they need to feed our collective fossil fuel addiction? If Pepsi and Coke support Sarah Palin in 2012, are liberals going to switch en masse to generic cola? If every company supports candidates you hate in order to support anti-regulatory, anti-tax agendas that will negatively impact the environment, our schools and everything else our government spends its tax revenues on, where else will consumers go? Corporations will, in effect, be able to advertise for their preferred candidates with virtual impunity and no one knows better than corporations how effective advertising can be. Short of waiting for another case to wend its way to a differently-constituted Court, there is only one real way to get around this decision, or any of the worse ones — like corporate electoral rights or corporate direct donation rights — telegraphed by some of the specific holdings of the Roberts Court. Either we take the significant time and effort to amend the Constitution to overrule the Supreme Court decision that corporations are entitled to equal protection under the law, or we accept that, as shareholders, customers and employees, our dividends, purchases and raises will be spent to convince us to elect officials who will do what’s best for the company’s bottom line and the CEO’s bonus.

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Big Tobacco Makes Secret Plea To Avoid Payout

January 16, 2010

WASHINGTON — Tobacco industry lawyers met secretly with Solicitor General Elena Kagan in an effort to avoid the government’s last-ditch attempt to extract billions from companies that illegally concealed the dangers of cigarette smoking, The Associated Press has learned. Four cigarette makers that control nearly 90 percent of U.S. retail cigarette sales have until Feb. 19 to persuade the government not to go to the Supreme Court and ask the justices to step into a landmark 10-year-old racketeering lawsuit. In 2006, a judge ruled that the industry concealed the dangers of smoking for decades. Despite that finding, lower courts have said the government is not entitled to collect $280 billion in past profits or $14 billion for a national campaign to curb smoking. As part of any effort to convince the government that it should skip a trip to the Supreme Court, the tobacco companies may have to drop plans to ask the justices to overturn the ruling that the industry engaged in racketeering. On behalf of the industry, Washington lawyers Michael Carvin and Miguel Estrada made their pitch against seeking Supreme Court review in a mid-December meeting at the Justice Department with Kagan, according to two Washington attorneys outside the government who are familiar with the meeting in her office. In the meeting, Carvin and Estrada left the impression the industry might be willing to end plans to seek a high court appeal of its own, if the Justice Department would do the same, said the Washington attorneys, who spoke on condition of anonymity so that they could discuss the private meeting with Kagan. The discussion with Estrada and Carvin resulted in an internal department meeting a few days later. At this meeting, department lawyers discussed the possibility of seeking billions of dollars from the industry as part of a possible negotiated settlement of the suit, according to one of the private attorneys who learned about this second meeting from participants. The department, the industry or both could request that the Supreme Court take the case, while at the same time asking that the case be delayed while the two sides try to work out a deal. If the companies also agreed not to seek an appeal, they would be accepting the findings of U.S. District Judge Gladys Kessler that they engaged in a scheme to defraud the public by falsely denying the adverse health effects of smoking, concealing evidence nicotine is addictive and lying about their manipulation of nicotine in cigarettes to create addiction. Last May, a federal appeals court upheld the findings. The companies then pledged to appeal to the Supreme Court. Kessler ordered the companies to make corrective statements about the adverse health effects of smoking, the addictiveness of smoking and nicotine, the companies’ manipulation of cigarette design and composition to ensure optimum nicotine delivery and the adverse health effects of exposure to secondhand smoke. These statements must appear on company Web sites, cigarette packages and newspaper and television ads. If Kessler’s findings stand, they will set a precedent that other plaintiffs can use for future suits against the tobacco companies. “The trial court’s findings are devastating to the tobacco industry,” said Matthew L. Myers, president of the Campaign for Tobacco-Free Kids, one of the public health groups allowed by Kessler to join the case in 2005 on the side of the Justice Department. “We have urged the department to go to the Supreme Court to significantly strengthen the remedies, particularly with regard to funding smoking cessation and public education.” Charles Miller, a Justice Department spokesman, declined comment, as did Carvin. Estrada didn’t return telephone calls to his office. Tobacco company defendants in the lawsuit are Philip Morris USA Inc. and its parent company, Altria Group Inc.; R.J. Reynolds Tobacco Co.; British American Tobacco Investments Ltd.; and Lorillard Tobacco Co. Philip Morris, R.J. Reynolds and Lorillard account for nearly 90 percent of U.S. retail cigarette sales. A former U.S. subsidiary of British American Tobacco, Brown & Williamson Tobacco Corp., merged with Reynolds in 2004. The way the federal suit has played out contrasts sharply with state action against the tobacco industry. The companies have agreed to pay $246 billion over 25 years to settle suits states brought to recover their costs of treating smoking-related illnesses in the Medicaid program, which serves the poor and disabled. ___ On the Net: Justice Department: http://www.justice.gov/ Campaign for Tobacco-Free Kids: http://www.tobaccofreekids.org/reports/doj/index.php Philip Morris USA Inc.: http://www.philipmorrisusa.com Altria Group Inc.: http://www.altria.com R.J. Reynolds Tobacco Co.: http://www.rjrt.com British American Tobacco Investments Ltd.: http://www.bat.com Lorillard Tobacco Co.: http://www.lorillard.com

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Dubai’s first foreclosure may open the floodgates

January 11, 2010

at law firm Al Tamimi & Co in Dubai. Courts then review the case and can issue a debt judgment that turns the property over to Dubai's Land Department for auction. Waugh estimates the process may take two to four months. Barclays, Britain's

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China Refers Case of Rio Tinto’s Stern Hu to Prosecutors, Australia Says

January 11, 2010

By Bloomberg News Jan. 11 (Bloomberg) — China, the world’s largest iron ore buyer, referred the investigation of four Rio Tinto Group executives, including Australian Stern Hu , to prosecutors, Australia’s government said. Chinese authorities “informed our Shanghai Consulate General that the investigation phase has now concluded,” the Department of Foreign Affairs and Trade said today in an e- mailed statement. The case is now in the hands of the Shanghai People’s Procuratorate, which will decide whether it should be brought to trial, the department said. Hu, head of Rio’s iron ore business in China, and three Chinese colleagues were formally arrested in August for allegedly stealing secrets related to the steel industry, a publication run by the prosecutors’ office said Aug. 12. The case has strained ties between Australia and China. “Everyone will be taking note, including the Americans and particularly the suppliers of raw materials to China such as the Africans, Indians and anyone who looks to do big resource-based business with China,” Peter Arden , a Melbourne-based senior mining analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co. in Melbourne, said before today. Review Period With the conclusion of the investigation, police will make a recommendation to prosecutors and then lawyers of the accused will be given a copy of the report, Tao Wuping , who represents detained Rio employee Liu Caikui , said by phone. Tao said prosecutors hadn’t told him that the investigation had ended. Lu Feng, a news officer at the Shanghai Municipal Public Security Bureau, the city’s police force, said they will make a statement on the investigation, without elaborating or confirming the Australian government’s remarks. “We are not in a position to say how long this phase of the case will take and are not prepared to speculate about the outcome,” Australia said today. Details of the charges are not likely to be known until the prosecutors make a decision on whether to send the case to trial, the department said. Prosecutors may review the case for one-and-a-half months before court hearings, Shanghai-based lawyer Zhai Jian said Aug. 19. Zhai’s firm represents two of the employees, Ge Minqiang and Wang Yong . The four were originally accused of the theft of state secrets, a charge that wasn’t included in the August arrest statement. Legal Process The transfer of the case to prosecutors “is the next stage in a continuing legal process under Chinese law,” Sam Walsh , head of Rio Tinto’s iron ore unit, said in an e-mailed statement. “It would not be appropriate for the company to comment any further at this point in the case other than to affirm our hope that matters proceed in an expeditious and transparent manner.” Managers are maintaining regular contact with the families of the detained employees, Rio’s statement said. Rio ships iron ore to China from its Australian mines. The company has about a third of its assets in Australia and its shares are traded there and in London. China is the biggest buyer of Australia’s iron ore. Chinese companies have continued to invest in Australia since the arrests. In October, China’s Yanzhou Coal Mining Co. won Australian government approval for its A$3.5 billion ($3.3 billion)takeover of Felix Resources Ltd. Exxon Mobil Corp. agreed in August to sell 2.25 million metric tons a year of liquefied natural gas to China from Australia’s Gorgon project for 20 years. Hu is a classically trained violinist who chose his English first name after virtuoso Isaac Stern , according to a person familiar with the executive. The four employees have been held since July 5 after police searched Rio’s Shanghai office, according to a Rio official who declined to be named. Hu, born in 1956 in Tianjin, is married with two children. He began work for Rio in the mid-1990s and was first based in Beijing where he managed relations with the company’s steel mill customers in northern China. — Rebecca Keenan , Helen Yuan . With assistance from Jesse Riseborough and Robert Fenner in Melbourne. Editors: Tan Hwee Ann , Jacob Lloyd-Smith . To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

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Odyssey Marine Loses Bid for `Black Swan’ Treasure Against Spanish Claim

December 23, 2009

By Thom Weidlich Dec. 23 (Bloomberg) — A U.S. judge ruled that property Odyssey Marine Exploration Inc. recovered from a sunken ship codenamed “Black Swan” must be returned to Spain. U.S. District Judge Steven D. Merryday in Tampa, Florida, adopted the recommendation of a magistrate judge that backed Spain’s position concerning the treasure from the ship, whose full name is Nuestra Senora de las Mercedes. Merryday said Odyssey could maintain the property while it pursues any appeal. “The ineffable truth of this case is that the Mercedes is a naval vessel of Spain and that the wreck of this naval vessel, the vessel’s cargo and any human remains are the natural and legal patrimony of Spain,” Merryday wrote in an order yesterday. Odyssey, which searches for sunken treasure, said in May 2007 it recovered more than 17 tons (15,422 kilograms) of silver coins from the ship, which went down in the Atlantic Ocean off the Strait of Gibraltar. Spain contested the company’s claim to the wreck. Spain claims the ship is “a Spanish frigate that exploded in a pivotal 1804 engagement with the British and precipitated Spain’s declaration of war against Britain,” U.S. Magistrate Judge Mark A. Pizzo wrote in his report on June 4. Odyssey fell 9 cents, or 5.3 percent, to $1.40 in Nasdaq Stock Market trading at 10:09 a.m. New York time. The shares fell 57 percent this year. ‘Legal Issues’ “Judge Merryday’s ruling serves to move this case to the appellate court faster, where we feel confident that the legal issues are clearly in our favor,” Greg Stemm , Odyssey’s chief executive officer, said in a statement. “The ruling yesterday does not affect the current operations of Odyssey, and we have not been counting on any revenue from the ‘Black Swan’ in any of our budgets since it was clear that this case would go to appeal no matter which way the judge ruled.” Pizzo agreed with Spain that the U.S. lacks jurisdiction over the case and recommended that Merryday drop it and order the property returned to Spain. None of the exceptions Odyssey offered to a federal law applied, he said. The Foreign Sovereign Immunities Act grants immunity to a foreign state’s property in the U.S. from being taken. Odyssey General Counsel Melinda MacConnel said in the company statement that the ship isn’t entitled to sovereign immunity because it was “serving a well-documented commercial – -not military — purpose when she sank.” More than 70 percent of the coins never belonged to Spain, she said. Most of Odyssey’s shipwreck projects “don’t have the same potential legal issues” as the ‘Black Swan’ case, Stemm said in the statement. Merryday also adopted Pizzo’s finding that the U.S. can’t decide Peru’s claim against Spain to some of the treasure. Peru wasn’t an independent nation at the time of the wreck. The case is Odyssey Marine Exploration Inc. v. The Unidentified Shipwrecked Vessel, 07-cv-614, U.S. District Court, Middle District of Florida (Tampa). To contact the reporter on this story: Thom Weidlich in New York at tweidlich@bloomberg.net .

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Raj Rajaratnam, Galleon Chief, Pleads Not Guilty In Insider Trading Case

December 21, 2009

NEW YORK — Wealthy hedge fund operator Raj Rajaratnam and a codefendant pleaded not guilty Monday to charges they were major players in a scheme that used inside information to make stock trades that generated millions of dollars in profits. Prosecutors, who have described the case as a “wake up call for Wall Street,” promised to hand over to defense attorneys 100 hours of intercepted phone calls made over eight months that they say implicate the defendants. Rajaratnam and Danielle Chiesi entered their pleas before U.S. District Judge Richard Holwell in Manhattan to an indictment returned last week in a $52 million insider trading case that has resulted in charges against 21 people. Assistant U.S. Attorney Josh Klein asked Holwell to set a trial date in June or July but defense lawyers balked, saying it would take months to review the audio tapes of telephone conversations between the defendants. Holwell declined to set a trial date but said he may eventually agree with prosecutors and schedule a summer trial. Klein also said evidence against the defendants includes post-arrest statements. Sri Lankan-born Rajaratnam, 52, of Manhattan, with an estimated $1.3 billion in net worth, and Chiesi, 43, of New York City, were indicted on conspiracy and securities-fraud charges after their October arrest. Both free on bail, they were friendly to one another in court. U.S. Attorney Preet Bharara said at the time of the arrests the case marked the first time prosecutors had made extensive use of wiretaps in a hedge fund insider trading case. The government says Rajaratnam carried out the scheme from a powerful post as the founder of the Galleon Group, a hedge fund that managed as much as $7 billion in assets at one point after its 1996 creation. Chiesi worked for New Castle, the equity hedge fund group of Bear Stearns Asset Management Inc. that had assets of about $1 billion under management. Outside court, Rajaratnam declined to comment. Chiesi said: “I really wish I could” speak publicly. Her mother, Gloria Chiesi, said: “My daughter is innocent. She’s an angel.” In court papers, lawyers for Rajaratnam have disputed the charges, saying he based trades on information that was already public. They also indicated they will fight the wiretaps, saying the government misled a judge into allowing investigators to surreptitiously tape phone conversations. Government documents have detailed some of the conversations. In one conversation with a government informant about a pending deal, Chiesi is quoted as saying: “I’m dead if this leaks. I really am … and my career is over. I’ll be like Martha (expletive) Stewart.” Stewart, the homemaking maven, was convicted in 2004 of lying to the government about the sale of her shares in a friend’s company whose stock plummeted after a negative announcement. She served five months in prison and five months of home confinement. The government said that in one conversation between Chiesi and Rajaratnam, Chiesi tells Rajaratnam she was “glad that we talk on a secure line, I appreciate that,” to which Rajaratnam replied: “I never call you on my cell phone.” According to the court papers, Chiesi said in the same conversation that she was “nervous” about being investigated.

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Cioffi’s Lawyer Says SEC `Not Likely’ to Settle Suit After Jury Acquittal

December 9, 2009

By Patricia Hurtado Dec. 9 (Bloomberg) — A lawyer for Bear Stearns Cos. hedge fund manager Ralph Cioffi said the U.S. Securities and Exchange Commission wasn’t likely to drop or settle its suit after Cioffi and co-defendant Matthew Tannin were acquitted last month. At a hearing today in U.S. District Court in Brooklyn, New York, Edward Little , a lawyer for Cioffi, told a federal magistrate presiding over the civil suit that he’d met with the SEC yesterday to ask the commission to drop it in light of the jury’s verdict. After a monthlong trial, a panel of eight women and four men took only nine hours to find both men not guilty on all six counts. During interviews after the verdict, several jurors said the government failed to prove the defendants defrauded investors who lost $1.6 billion in the two hedge funds run by the men — both of which were mostly made up of subprime mortgage-backed securities. “What are the prospects for a settlement, by now you’ve seen a lot of each other’s evidence?” U.S. Magistrate Judge Viktor Pohorelsky asked. “We had a meeting yesterday and the gist of it is we were imploring the SEC to drop the case in light of the swift jury verdict,” Little told Pohorelsky. “No, that’s not likely, it’s not going to settle and we’re going to trial,” he said. Scapegoats The funds collapsed in 2007, as did Bear Stearns itself less than a year later. The defendants, according to juror Serphaine Stimpson, were made “scapegoats for Wall Street.” Prosecutors missed the mark so widely in the fraud trial that a juror said after the acquittal she would invest with the fund managers if she had the money. Cioffi, 53, the portfolio manager for the two funds, and Tannin, 48, their chief operating officer, went on trial Oct. 13 in federal court in Brooklyn, New York, on charges of conspiracy, securities and wire fraud. Each had faced as many as 20 years in prison if convicted. Their two funds failed when prices for collateralized debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt. Bear Stearns was purchased the next year by New York-based JPMorgan Chase & Co. The government alleged Cioffi and Tannin continued to seek investors in their funds after they learned they were financially unsound. Dispute Little told Pohorelsky that he believed a wire fraud count dismissed by prosecutors because of lack of venue was “duplicative” and he thought that effort to pursue that count in another jurisdiction, such as in Manhattan, where the Bear Stearns funds were located, would constitute “double- jeopardy.” Pohorelsky today asked about a dispute between the SEC and Tannin’s lawyers regarding evidence which the commission sought from him, including computers, hard-drives and e-mails. The SEC said in court papers that it had produced nine million pages of documents while Tannin objected to turning over evidence, if any relevant materials existed, citing Fifth Amendment privilege. The SEC in June filed a motion to compel Tannin for the material. The matter was held in abeyance pending the criminal trial. Chance to Review “I’m really looking at the defense,” Pohorelsky said. “Their set of road blocks was the assertion of privilege, but it appears that has given way, seeing the acquittals? “The motion to compel was held in abeyance pending the criminal trial but it may all be moot now?” the magistrate asked. “We do assert privilege without waiving it,” said Tannin’s lawyer, Nina Beattie . “We just want to review, given the passing of time. We would like to take a good hard look.” John Worland Jr., an SEC lawyer, said he would defer the issue to another commission lawyer, Brian Sano, who he said, “knows more about the case than anyone at the SEC.” “By the end of January we’ll know, your honor,” he said. Pohorelsky directed that the parties return to court on Jan. 27 to discuss the number of witnesses’ depositions which needed to be taken in the civil case, which is being presided over by U.S. District Court Judge Frederic Block , who oversaw the criminal case. Beattie declined comment after court. ‘Zero’ Chance Asked after court his opinion on the likelihood the SEC would settle or drop the case, Little, who is representing Cioffi with another lawyer, Marc Weinstein , said “Zero.” “We told them they should drop the case in light of the quick, definitive verdict and they didn’t say one way or another,” he said. “We’re prepared to go to trial.” Neither Cioffi nor Tannin were in court today. Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The funds, which invested most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt. The funds, part of Bear Stearns Asset Management Inc., were the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High- Grade Structured Credit Strategies Master Fund Ltd. The case is SEC v. Cioffi, 08-CV-2457, U.S. District Court for the Eastern District of New York (Brooklyn). To contact the reporter on this story: Patricia Hurtado in U.S. District Court for the Eastern District of New York in Brooklyn at pathurtado@bloomberg.net .

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Bernie Sanders Moves To Block Bernanke Confirmation

December 2, 2009

Senator Bernard Sanders of Vermont said on Wednesday that he would try to block the Senate from confirming Ben S. Bernanke to a second term as chairman of the Federal Reserve. The move is unlikely to derail Mr. Bernanke’s reappointment, but it could slow the confirmation process and give the Fed’s critics additional opportunity to press their case. As a practical matter, it means Senate Democratic leaders will have to line up 60 votes in favor of Mr. Bernanke rather than a simple majority at a time when the Federal Reserve is under increasing populist attacks from lawmakers on both the right and the left.

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Overseas Reach of U.S. Securities Law to Get Review by Top Court Next Year

November 30, 2009

By Greg Stohr Nov. 30 (Bloomberg) — The U.S. Supreme Court agreed to use a shareholder lawsuit against National Australia Bank Ltd. to consider extending the reach of the country’s securities laws overseas. The justices today said they will review a federal appeals court decision that the suit by Australian stockholders of Melbourne-based NAB was beyond the jurisdiction of U.S. courts. The case, which the justices will consider next year, becomes one of the top business disputes of the nine-month term. The U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association filed briefs when the dispute was before the 2nd U.S. Circuit Court of Appeals in New York. The Supreme Court agreed to hear the appeal against the recommendation of the Obama administration, which urged the justices not to hear the case. The investors say HomeSide Lending Inc., formerly a Florida-based mortgage-service subsidiary of NAB, fraudulently overvalued its assets, eventually forcing $2.2 billion in writedowns. NAB disclosed in 2001 that interest-rate assumptions used by HomeSide in a valuation model were incorrect and caused inflated estimates of mortgage-servicing fees. Writedowns in 2001 caused the bank’s American depositary receipts to fall more than 11 percent. Fraud in U.S. The shareholders contend that the core of the alleged fraud occurred in the U.S., giving American courts jurisdiction to consider the case and apply U.S. securities laws. “Every false statement made by NAB concerning HomeSide’s operations, results and value was a repetition of the false financial information that HomeSide concocted in Florida for the very purpose of misleading NAB’s shareholders,” the appeal argued. The 2nd Circuit rejected that reasoning, saying in its 3-0 ruling that NAB compiled and issued its public statements in Australia. “The actions taken and the actions not taken by NAB in Australia were, in our view, significantly more central to the fraud and more directly responsible for the harm to investors than the manipulation of the numbers in Florida,” the three- judge panel said. NAB told the Supreme Court that “every single one” of the alleged misstatements and omissions were made in Australia by the parent company. NAB acquired HomeSide in 1998, then sold it to Washington Mutual Inc. in 2002. Courts around the country have used different standards to determine whether judges can consider so-called “foreign cubed” lawsuits, those that involve non-U.S. plaintiffs, corporations and markets. The case is Morrison v. National Australia Bank, 08-1191. To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net .

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Cancer Deaths in Europe Fall as More Smokers Kick Habit, Researchers Say

November 30, 2009

By Karin Matussek Nov. 30 (Bloomberg) — The trial of John Demjanjuk, Germany’s most prominent Holocaust case in decades, may demonstrate the justice system’s limits in helping the nation come to terms with its troubled past, lawyers said. Demjanjuk, 89, is accused by prosecutors of being a Nazi guard who aided in the murder of 27,900 people in 1943 at the Sobibor death camp in then German-occupied Poland, according to the indictment. About 35 relatives of the camps’ victims have registered as co-plaintiffs for the trial scheduled to start in Munich today. Demjanjuk’s case has been closely watched since a Munich court issued an arrest warrant for him in March and he was deported from the U.S. two months later. About 6 million Jews were killed in the Holocaust and Germany has been criticized for allowing too many perpetrators to escape punishment. “People are looking for the historic dimensions that transcend the narrow legal issues of the case,” Thomas Henne , a German legal historian currently teaching at Tokyo University , said in an interview. “The question is whether a criminal court is the right place to find historic answers. It’s difficult enough to judicially determine an individual’s guilt six decades after the fact.” There is no evidence of his participation in any killings, Demjanjuk’s lawyers claim. “My father has never hurt anyone anywhere,” Demjanjuk’s son, John Demjanjuk Jr., said in an e- mailed statement. ‘Cartel of Silence’ While prosecution of Nazis in German courts started only years after the war, some prominent cases helped break the country’s “cartel of silence,” Henne said, including the Auschwitz trials during the 1960s in Frankfurt where hundreds of concentration camp survivors testified. Still, some probes led to unconvincing acquittals or allowed Nazis to all too easily claim medical reasons to avoid trials, he said. “With Demjanjuk, the current generation of prosecutors and judges aims to show they won’t repeat these mistakes,” Henne said. “The swift handling of the case is a sort of manifest demonstration saying: ‘Yes, we’re doing better now.’” Demjanjuk, a Ukraine native and retired autoworker, lived near Cleveland until he was stripped of his U.S. citizenship and extradited to Israel in 1986. He was tried in that country on charges he was “Ivan the Terrible,” the guard who tortured Jews while herding them into the Treblinka concentration camp gas chambers. His death sentence and conviction in the case were overturned by Israel’s Supreme Court in 1993, saying there was reasonable doubt that he served at Treblinka. Demjanjuk returned to the U.S., regaining his citizenship. In 2002, a court again revoked it over his alleged role at Sobibor. German Investigation Germany’s central Nazi crime investigation unit started to look into Demjanjuk in 2008 after stumbling over his U.S. citizenship case on the Internet. After an eight-month investigation, they referred the matter to Munich prosecutors. His lawyer says prosecutors rely on an identity card and a staff list to prove he served at Sobibor and wrongfully infer he must have aided in the murders because he was there. The lawyer, Ulrich Busch, said document experts found that the ID card was forged. “It is all a farce and cannot withstand the test of litigation,” Demjanjuk’s son said in the statement. Documents from the time are generally reliable because Germans were “extremely diligent with paper work,” said Berlin historian Angelika Benz in an interview. Benz is studying Russian prisoners of war trained at the Trawniki camp in occupied Poland to become guards, a group to which prosecutors claim Demjanjuk belonged. “Sobibor was an extermination camp, so anyone who worked there was part of the murder machinery,” she said. “There wasn’t anything else to do there, it wasn’t a labor camp.” ‘Highly Problematic’ While historians may be able to come to such conclusions, a criminal court may require a more detailed account, both Henne and Benz said. To rely solely on a general conclusion for a guilty verdict could be “highly problematic,” said Klaus Marxen , a criminal law professor at Berlin’s Humboldt University. A conviction normally requires evidence of individual acts, he said. The judges will also have to examine whether Demjanjuk can escape punishment because he may have enlisted as a guard to save his own life, said Marxen. Prosecutors claim that Demjanjuk could have fled to avoid committing crimes. While Trawniki guards fled on occasion, some of those caught were executed, Benz said. “From today’s point of view, it’s difficult to determine why an individual acted in the way he did back then,” Benz said. “We should be very careful with the term ‘voluntarily’ here.” The court has scheduled trial days until May. Three professional and two lay judges will hear the case. If convicted, Demjanjuk may face a prison term of as many as 15 years. Because Demjanjuk suffers from an incurable bone-marrow disease, doctors said he’s only able to follow two 90-minute court sessions a day. If his health deteriorates, the court may have to drop the case, Marxen said. To contact the reporter on this story: Karin Matussek in Munich via kmatussek@bloomberg.net ;

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New Orleanians Find Reason to Let Good Times Roll: Ann Woolner

November 19, 2009

Commentary by Ann Woolner Nov. 20 (Bloomberg) — Picture Hurricane Katrina without the broken levees, with minor flooding that quickly drained, with no folks chopping through the attics of New Orleans in desperate hope of rooftop rescue. So it might have been if the U.S. Army Corps of Engineers hadn’t flunked its job so completely and so repeatedly. This week U.S. District Judge Stanwood Duval Jr . ordered the Corps to pay five flood victims $720,000, a pittance compared with what they should get. But the law makes it nearly impossible to win a case against the Corps, so the fact they won anything makes the ruling monumental. However small, the award speaks to the vast scope of the Corps’ negligence. The ruling, 156 pages long and meticulous in its recounting of events and evidence, could help 100,000 victims or more collect, too. To understand why such a puny sum makes such a huge statement, consider that a 1928 law immunizes the government against claims that its flood-control projects don’t work. So last year Duval ruled he could do nothing to force the government to compensate plaintiffs for the collapse of its various flood-control structures. That he wished he could was clear. He cited the “catastrophic failure of the Corps to fulfill its mission” and lamented that under the 1928 law “gross incompetence receives the same treatment as simple mistake.” Shipping Shortcut But that wasn’t the end of the case. The plaintiffs say the Corps made the devastation worse by building a canal as a shipping shortcut and letting it deteriorate. That’s what sent much of the flood waters over the Lower 9th Ward of New Orleans and nearby St. Bernard Parish. Seventy-six miles long, the Mississippi River-Gulf Outlet, known locally as MR-GO or Mr. Go, connects New Orleans’s inner harbor with the Gulf of Mexico. The beauty of it, from the plaintiffs’ standpoint, is that it was built for navigation. That means it isn’t protected by the 1928 law , which only immunizes the Corps for flood-control projects gone bad. Even then, the Corps won some immunity because the channel’s construction was a matter of government “policy.” Any issues related to its design or construction are off limits. So, let’s recap to ponder the breadth of the government’s immunity, according to an obviously reluctant Duval. Even if the Corps knew its levees, pumps and drainage canals couldn’t protect New Orleans against hurricane-driven flooding, no flooding&cle;, no matter the extent of its negligence, it was safe from liability. Legal Cover Likewise the Corps had legal cover for anything related to the way even the navigation channel was built. Still, that wasn’t the end of the case. So massive were the government’s failures that some of them slipped out from under the generous protection of the law. The Corps could still be sued for the way it operated and maintained MR-GO. And the government made such a horrific mess of it that it created a breach of a critical levee. The constant pounding of ships’ waves against the banks of the canal so degraded them that the channel’s width had doubled and, in some places, tripled. Its levees had sunk to dangerously low heights. The Corps knew by 1988 that the ever-worsening condition of MR-GO “threatened human life” and had ideas how to fix it. And yet, the Corps “did not act in time to prevent the catastrophic disaster,” Duval wrote. Degraded Wetlands The channel degraded wetlands, which made the area more vulnerable to hurricane damage. In various parts of MR-GO, critical shoring up either never happened or was too late or too flimsy to be of much help, wrote Duval, who presided over a month-long trial in April. All the Corps wanted to do was keep the channel open to deep-water shipping, paying no attention to human or environmental consequences. The Corps claimed at trial that any weaknesses of MR-GO weren’t to blame for the flooding. After the ruling, the Justice Department said it would review the matter before commenting. The puny awards to the plaintiffs don’t reflect the vast damage the Corps did, or that the judge found its top expert “prevaricated” or that government claims directly contradicted proven facts. The degree to which plaintiffs won compensation depended on how much of their flood damage could be attributable to the levee breach caused by MR-GO’s condition. Some got none, some got partial compensation, some got it all. The government will no doubt appeal. And perhaps a higher court will find even the Corps’ gross negligence in maintaining MR-GO to be immunized somehow. But the ruling should motivate Congress and the Obama administration to stop defending the indefensible and settle with the Corps’ Katrina victims. ( Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.) To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net .

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Bear Stearns Managers’ Acquittal May Hamper Other U.S. Fraud Prosecutions

November 11, 2009

By Patricia Hurtado, Bob Van Voris and Linda Sandler Nov. 11 (Bloomberg) — The acquittal of two Bear Stearns Cos. hedge-fund managers in a subprime-mortgage fraud case that relied heavily on e-mail evidence may make it more difficult for the government to win related cases based on similar facts. The loss in the face of allegedly incriminating communications between Ralph Cioffi and Matthew Tannin may prompt prosecutors and regulators to be less aggressive in cases stemming from the handling of subprime investments, as well as hedge fund cases such as those related to Galleon Group, former prosecutors and defense lawyers said. The verdict, returned in nine hours after a monthlong trial, may provide prosecutors of Galleon co-founder Raj Rajaratnam and his alleged confederates with a cautionary lesson, said attorney Bradley Simon . “It is a risky proposition to rely on such communications, because they are open to multiple interpretations,” said Simon , a former federal prosecutor now in private practice in New York. The acquittal of the Bear Stearns managers yesterday in Brooklyn, New York, federal court on fraud and conspiracy charges also may damage a related Securities and Exchange Commission suit against the two men. Additionally, prosecutors backed off previous statements that Cioffi and Tannin may face a wire fraud charge in Manhattan federal court. Cioffi, 53, the portfolio manager for the Bear Stearns funds, and Tannin, 48, their chief operating officer, each faced as many as 20 years in prison. The Brooklyn trial was the first stemming from a U.S. probe of the collapse of the subprime mortgage-market, which cost investors as much as $396 billion. They were indicted in 2008 in a case brought by Brooklyn U.S. Attorney Benton Campbell a year after their funds failed. Give Pause This “will give the government pause before they indict” in similar cases, said Todd Harrison, an ex-federal prosecutor. “For those kinds of cases that are more market driven, as the Bears Stearns was, it’ll give the government a lot of pause.” Simon said the government took a risk by relying on electronic communications to try to convict Cioffi and Tannin of defrauding investors. Prosecutors alleged the men touted their funds while privately acknowledging their financial health was unsound. In Galleon, a prosecution that relies in large part on wiretapped conversations, “the government’s going to have to show they were illegally trading on insider information instead of doing legitimate research.” In the Bear Stearns case, the defense argued successfully that Cioffi and Tannin were honestly optimistic about the funds’ health. E-mails which the men sent were more ambiguous than the government alleged, defense lawyers told the jury. Wasn’t Enough The jurors said after the verdict that the evidence presented wasn’t enough to convince them of guilt. “Everything contradicted,” said Jenny McCaughey, the jury forewoman. “The e-mails went both ways. They say one thing one time and another thing another time. The government didn’t give us enough to go on.” Prosecutors accused both men of misleading investors who lost $1.6 billion when the funds collapsed in 2007, calling 21 witnesses and presenting hundreds of pages of documents. Dane Butswinkas , Cioffi’s lawyer, accused the government of selectively presenting the facts of the case and quoting e-mails sent by both men out of context. “This is a case that is built on misimpressions, on e- mails pulled out of time without the presentation of the back story,” Butswinkas told jurors in his closing arguments. Susan Brune , a lawyer for Tannin, said the case was “built on hindsight and bias.” She cited e-mails from Tannin, Cioffi and others at Bear Stearns that were positive about prospects for the funds and about buying opportunities in a down market. “There is reason to believe that the funds weren’t going to tank, that’s what they believed,” Brune told jurors. Revealed Evidence While communications between defendants also form the core of publicly revealed evidence in the Galleon prosecutions, the government has cited guilty pleas, informants and trading records to support that case. Rajaratnam was arrested on Oct. 16 and accused with five others of making millions of dollars by trading on inside information. He has denied wrongdoing. Federal prosecutors this month charged another 14 people in their widening probe of insider trading related to that New York-based hedge fund. The 20 people charged so far earned at least $53 million in illicit profits, the U.S. has said. “You have to show a personal benefit from the transactions, or a lie” to convince a jury, and the government didn’t succeed with Cioffi and Tannin, said Peter Henning , a legal ethics professor at Wayne State University Law School in Detroit and a former federal prosecutor. ‘Impending Collapse’ Robert Mintz, an ex-federal prosecutor in private practice, said the Bear Stearns jury found the “government was trying to unfairly hold these defendants responsible for predicting the impending collapse of the economy at a time when even economists uncertain as to where the world markets were headed.” While the Bear prosecution failed, the taped evidence in the Galleon case may be seen by jurors as more incriminating than e-mails, defense lawyers said. In the Galleon case, the government’s complaint against Danielle Chiesi , a former money manager at hedge fund New Castle Partners LLC who allegedly leaked inside information to Rajaratnam, quotes her as saying that if the government found out about the information she was relaying to an unnamed co-conspirator, she would go to jail. “I swear to you in front of god, you put me in jail if you talk,” Chiesi said in August 2008, prosecutors said. The Bear Stearns fund managers expressed ambiguity in their e-mail conversations, according to their defense lawyers and former Bear Stearns employees who testified at the trial. “There wasn’t enough clear and convincing evidence,” said juror Tabasam Bhatti, 31, a New York City employee. Second Thoughts Serphaine Stimpson, 27, another juror, said she initially entered the case thinking both men were guilty. As the trial unfolded, she said she began to have second thoughts. “Something happened,” said Stimpson, an office coordinator at Brooklyn College. “We just weren’t 100 percent convinced.” Larry Ribstein, a law professor at University of Illinois, said the Bear Stearns case was “standard business dealings where the views of the markets were shifting rapidly and these guys were being criminally punished for expressing views on one day and acting differently another day. This never should have been the subject of a criminal prosecution.” “You’re kind of damned if you do and damned if you don’t,” Ribstein said of the Bear Stearns defendants. “If you overplay the negativity of the circumstances then you’ve got a full-fledged bank run on your hands. On the other hand, if you play it on the optimistic side, you go to jail.” Trying to Save Jurors said they concluded that Cioffi and Tannin were trying to save the funds after lenders stopped extending credit. “The jury just didn’t buy the notion that they were telling lies and recognized that no one has a crystal ball,” said David Douglass, a former federal prosecutor. E-mails at times can be unreliable evidence, according to Gerald Shargel , a criminal defense lawyer in New York who represented lawyer Marc Dreier on charges he defrauded hedge funds out of more than $400 million. “Everybody knows that e-mail messages are not thought out,” Shargel said. “Mistakes are made, they are sent to the wrong person, they are not proofread. Jurors have experience with e-mails, and they know they can be unreliable.” Cioffi and Tannin also face lawsuits by investors and Bank of America Corp. Last month, a federal judge in Manhattan refused to dismiss contract and fraud claims against Bear Stearns, now a unit of New York-based JPMorgan Chase & Co. Hedge Funds Mortgage-backed assets mostly owned by Bear Stearns hedge funds were used to back the sale of securities in a transaction structured by Bank of America, the Charlotte, North Carolina- based bank said in its 2008 complaint. Hedge fund losses hidden from Bank of America led to the funds’ collapse and caused an “enormous decline” in the assets behind the securities and the securities themselves, the bank alleged in its complaint. Last week, federal prosecutors in Brooklyn said that Cioffi and Tannin would face a new prosecution in Manhattan federal court for wire fraud. The government last week dropped a wire fraud charge in the Brooklyn case because the allegations in the specific count purportedly occurred in Manhattan, located in the federal court system’s Southern District of New York. Brooklyn is located in the Eastern District of New York. Yesterday, Campbell’s office declined to say whether the wire fraud charge, also related to the collapse of the Bear Stearns funds, would be filed. The SEC lawsuit against Cioffi and Tannin, brought last year, alleges they misled investors about the funds’ deepening financial troubles and their own holdings. Awaiting Trial The regulator’s case, still awaiting trial, requires a lower standard of proof than a criminal conviction. Even after the acquittals, Cioffi and Tannin might decide to settle the SEC’s claims because a lawsuit carries a lower burden of proof and the stakes won’t be as high, said Harrison, who worked as a federal prosecutor in Brooklyn, and is now in private practice at Patton Boggs LLP in New York. “It certainly gives them much more leverage in the SEC case, to point to the criminal case and say ‘Look, a jury didn’t buy it there,’” said Harrison, who didn’t work on the case while a federal prosecutor. John Nester, a spokesman for the SEC, said yesterday that, “we expect to go forward with litigating our civil action.” The Bear Stearns hedge funds, which filed for bankruptcy in July 2007, were the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. Two Funds The two funds failed when prices for collateralized debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt. Cioffi and Tannin claimed in e-mails and conversations to be adding their own money to the funds in the months immediately prior to their collapse, according to the government. Neither man added any money to the funds, once valued at $20 billion, the U.S. alleged. Lawyers for Cioffi and Tannin said that, according to Bear Stearns private placement memos, the fund managers had no duty to disclose what they were doing with their money. The defense also said that the government failed to prove that investors had relied upon statements made by the defendants during an April 25, 2007, investor conference call. Prosecutors claimed that Cioffi moved $2 million — one third of his holdings in the funds — to another Bear fund which he supervised. The U.S. alleged that he moved the money in March to a fund that was still profitable. Insider Trading The government argued Cioffi committed insider trading when he moved the money ahead of investors who lost money in his funds and while using material, non-public information because of his role as a fund manager. In the Bear Stearns prosecution, there were no cooperating witnesses testifying against the two men. While the government case against Galleon’s Rajaratnam began with complaints citing wiretapped conversations, more evidence — and possible witnesses — have been revealed since then. Five people have pleaded guilty in the Galleon case and are cooperating with investigators. The guilty pleas of Richard Choo-Beng Lee, Gautham Shankar , Roomy Khan, Steven Fortuna and Ali Far were made public last week. The case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court for the Eastern District of New York (Brooklyn). To contact the reporters on this story: Patricia Hurtado in U.S. District Court for the Eastern District of New York in Brooklyn at pathurtado@bloomberg.net ; Bob Van Voris in New York at rvanvoris@bloomberg.net ; Linda Sandler in New York at lsandler@bloomberg.net .

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Ralph Cioffi, Matthew Tannin Verdict: Ex-Bear Stearns Hedge Fund Managers NOT GUILTY On All Fraud Charges

November 10, 2009

Former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin were acquitted of a host of fraud and insider trading charges today, according to Reuters . Last year, Cioffi and Tannin were charged with insider trading, securities fraud, wire fraud and conspiracy after authorities charged that the two executives misled investors about the well-being of two Bear Stearns hedge funds. The case, which was heard in Brooklyn, New York’s District Court was widely watched as a litmus test for future fraud cases involving financial executives and the financial crisis. Here’s how the Wall Street Journal summarized the trial last month: The money managers unsuccessfully scrambled to keep two mortgage-heavy Bear Stearns hedge funds afloat in 2007 amid sinking mortgage-market prices, the first of several blows that eventually felled Bear Stearns and marked the start of the credit crisis. J.P. Morgan Chase & Co. bought the firm in a March 2008 fire sale… “This case will be viewed by many as a test of where the boundary lies between acceptable, positive spin and outright fraud,” says David Siegal, a former federal prosecutor who now is a defense lawyer at Haynes & Boone LLP. “Much of the government’s case appears poised to rely on what many previously believed was just spin.” Check back here for more information on the case….

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Video: Tecce Expects More Antitrust Cases Brought Against Intel: Video

November 5, 2009

Nov. 5 (Bloomberg) — Former assistant U.S. attorney Fred Tecce talks with Bloomberg’s Julie Hyman about the case brought against Intel Corp. by New York Attorney General Andrew Cuomo. Intel was accused by Cuome of threatening computer manufacturers and making billions of dollars in illegal payments to pressure them to use its chips. (This report is an excerpt of the full interview. Source: Bloomberg)

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Eben Moglen: An Important Patent Law Precedent Approaches

November 2, 2009

The SFLC and I recently filed a brief in Bilski v. Kappos , along with plenty of other lawyers, and I gave a talk about the case, and the future of patent law, this morning at Cardozo Law School. The outpouring of amicus briefs in this case, which will be heard by the Court on November 9, must be particularly noticeable to the Justices and their law clerks: a stack of dozens of third-party briefs seeking attention would have been the lunchtime talk of that inner core of the Court back when I worked there, and I’m pretty sure that hasn’t changed. A high stack of amicus briefs — which we called “greens,” for the color of the cover in which the Court requires they be bound — means people outside the Supreme Court think the case is important. Bilski is very important indeed. The Supreme Court and Congress must soon begin shaping patent law for the 21st century. In Bilski , the Supreme Court has an excellent place to start. Patents used to be given only for products that could be delivered in a box. The Constitution authorizes Congress to give “Inventors” limited-term exclusive rights, but the inventions the founding generation had in mind were physical products of manufacture, like a sewing machine, a cotton gin, or a revolver. Only in 1953, after the industrial transformation of the American economy was long since complete, did Congress amend the Patent Act to permit “process” as well as “product” patents. Within decades of the change, patent law was being used for purposes that Congress had plainly not envisioned in 1953. “Process” patents were being granted on computer programs and methods of doing business using computers to do what used to be done by human beings. We live now not in an industrial, but in a post-industrial information economy, where complex services combining human and machine intelligence — finance, pharmaceutical discovery and development, business process software — are protected by patents just as complex products combining human intelligence with physical processes mobilizing matter–geochemical discovery and development, metallurgy, structural engineering–characterized the industrial economy. But patent law cannot award ownership of facts of nature, or mere mental activities, or algorithms: the US Supreme Court has been unambiguous on that point for more than 150 years. For the last 20 years, the US PTO and its supervising appellate court, the Court of Appeals for the Federal Circuit, have been granting patents for inventions consisting of software, or business methods enabled by software. Then, in a series of recent opinions, the Supreme Court began signalling discomfort with the state of patent law, “tightening up” on the requirement that an invention be non-obvious to be patentable, and even intimating that the patentability of software was an open question. So the PTO and the CAFC have moved to rein in the absurdities that characterized yet another bubble of the Second Gilded Era: the patent bubble that cost consumers around the world so many hundreds of billions of dollars. Mr Bilski and Mr Warsaw, like so many other disappointed investors just now, were a little too late at the window where you could get the Patent Office to make non-existent real estate for you. Their computer-assested means of hedging commodities trading risk fails muster of patentability under what the CAFC reluctantly and discordantly says is the test the statute and the Supreme Court meant it to use all along. Bilski and Warsaw’s patent, as a lawyer I don’t agree with about anything else recently said, is a patent everybody knows you shouldn’t get. So now, shorn of all the technicalities, the Supreme Court gets a chance to say whether it means what it’s always said, or whether it wants to endorse the fast and flashy round-heeled patent system we were running during the boom times. Of course, it can always do nothing at all, or make a new alternative that wasn’t there before; that’s what being the Supreme Court means, as any Legal Realist will tell you. But one thing is certain, that if they wind up saying anything at all, what the Justices say in this case will determine the course of patent law for a long time to come.

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Jenny Darroch: Interesting Innovations that Generate Growth and Shape Markets

October 28, 2009

Every now and then I come across an innovation that makes me stop and think “what a great idea” [or: "why didn't I think of that?"]. It happened again the other night when I was watching television and I saw an ad for PowerMat — a wireless recharging device that will solve one of the big problems of today: how to find the right cords, and enough power sockets, to charge phones, hand held electronic games, MP3 players and the like. For our family of four, this problem is exacerbated when we travel: four cell phones, at least two iPods, and at least one PSP to charge in a hotel with only two available power sockets, all of which have to compete with the laptop that also needs to be recharged. For some reason, I am the one who usually sneaks around the hotel room at 3 in the morning to switch over devices so everyone is charged up and ready for the next day. There have been other innovations that have made me stop and think “what a great idea”: wheels on suitcases, an idea attributed to Northwest Airlines pilot Bob Plath in 1989; cell phones, which were first available commercially in 1984; Post-it Notes, which 3M started distributing in 1980; the revolutionary Pampers disposable diaper launched by Procter & Gamble in 1961; or the Swifter, another Procter & Gamble invention, launched in 1999. What binds these ideas together is that all solve consumer problems: finding cords and power sockets to recharge devices, carrying suitcases around airports and hotels, being accessible by phone when away from the office or home, keeping track of pages in a document or book, no-fuss management of diapers, and cleaning surfaces without breaking backs. Something else common to these ideas is that consumers are not likely to have been able to articulate the solution — i.e. consumers probably did not say: “I have a problem when I charge electronic devices because I can never find my the right power cords or enough power sockets. Can you develop a wireless recharging device for me?” Alternatively, consumers might have articulated the problem (or PowerMat developers might have observed the problem by watching consumers in action): “I can never find the right power cords to enable me to charge all of my devices”. Here, the problem was evident to PowerMat who then set about developing a solution. I don’t know the story behind PowerMat but the process might also have begun with a solution, for example, wireless technology, looking for a problem. In this case, the technology existed but for the solution to succeed, the developers had to link it to a consumer need. Early indicators suggest PowerMat did uncover a substantial unmet need (the problem of recharging) and product reviews suggest that the PowerMat will be successful. There is something else that binds together the examples I have used. In all cases, they led (or in the case of PowerMat, will lead) to a fundamental change in consumer behavior. If PowerMat is in fact as successful as the early reviews suggest, it will permanently change the way we recharge electronic devices. If PowerMat can stay ahead of the curve as competitors join this new market created by PowerMat, then it will be attributed with having redefined the way we do things. As companies look for strategies to generate growth that is innovative and exciting ways to redefine the organization post-recession, it is important to think in terms of the problems and solutions framework outlined above. That is, remember that not all consumers can articulate a problem they have with current product offerings. Plus, the majority of consumers are unable to come up with solutions to problems they have with current product offerings. To find exciting ways to generate growth then, marketing managers and new product development teams need to focus on problems, both explicit and latent, and set about finding solutions to these problems. History tells us that sustainable competitive advantage comes about by developing innovations that solve consumer problems — innovations that shape behavior and create new markets. Jenny Darroch is on the faculty at the Drucker School of Management. She is an expert on marketing strategies that generate growth. See MarketingThroughTurbulentTimes.com

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Naomi G. Goldberg: ‘Save for Retirement Week’ Rings Hollow for Gay and Lesbian Couples

October 23, 2009

The United States Congress has designated this week as National Save for Retirement Week to encourage Americans to save for retirement. Research continues to shows that the majority of Americans aren’t doing enough to prepare for retirement. A 2009 report from the Employee Benefits Research Institute found that 53% of American workers have less than $25,000 in total savings and investments. For most Americans, the congressional cheerleading is backed up by a range of substantive policies that provide incentives for savings. But for members of same-sex couples, the Congressional proclamation will ring hollow. Federal policies penalize gay and lesbians for retirement savings and greatly hamper their ability to provide for their families after they die. In two new studies released this month by UCLA School of Law’s Williams Institute, researchers have found that when compared to different-sex married couples, gay and lesbian couples have less retirement income and have less ability to provide for their families after they die. For example, female same-sex couples have 20% less income during retirement than different-sex married couples, and they rely more heavily on social security benefits. Male same-sex couples are more likely to continue working during retirement and rely on wage income as a large share of their income during retirement. One of the main incentives for retirement savings is to provide for family members after death. Federal policies make this more difficult for same-sex couples. For example take two hypothetical couples: Joe and Marla and Jared and Mark. Both couples have been together for twenty years and have raised children. Both couples are among the half of Americans whose jobs sponsor a defined contribution retirement plan, like a 401k. Unexpectedly, Marla and Mark die. In the case of Joe and Marla, the balance of Marla’s 401k can be transferred to Joe without any tax bill. Joe can then wait until age 70½ to begin taking money from this retirement account. Jared can still rollover the balance of Mark’s 401k into an IRA. But, because Jared isn’t recognized as Mark’s legal spouse, Jared will lose nearly half of any amount over $3.5 million due to the estate tax. Plus, Jared will be forced to take money out of this account immediately, even if he doesn’t need that money now -and the money will be taxed more now as opposed to when he’s older and less likely to have income from other sources. Jared doesn’t have the option of waiting until he is 70½ like Joe does. Plus, if Mark’s estate, such as the value of his house, retirement plans, stocks, cars, or artwork, is worth more than $3.5 million, Jared will have to pay the estate tax on that value. In 2009, it is estimated that 73 same-sex couples will be in just this situation. And they will, on average, have a tax bill of $3.3 million. Meanwhile, all of Marla’s assets can be transferred to Joe without any taxes. Much of this inequality in retirement assets and estate taxes is due to the fact that same-sex couples aren’t recognized as married couples by the federal government. This is the case even if they are legally married in Massachusetts, Connecticut, or Iowa. The repeal of DOMA would mean that for legally married same-sex couples, this unfair taxation on retirement assets would end. Even prior to the repeal of DOMA however, Congress could address these estate tax and retirement plan inequalities similar to the way it allowed same-sex spouses to rollover, albeit with strings attached, the balance of their dead spouse’s 401ks in 2006. As part of National Save for Retirement Week, Congress should turn its attention to the ways in which committed, same-sex couples are treated unfairly and are disadvantaged when it comes to the ability to prepare for retirement and protect their families. For these families, federal proclamations should be backed by federal policy.

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U.S. Said to Target Wave of Insider Trading Cases After Rajaratnam Arrest

October 18, 2009

By Joshua Gallu and David Scheer Oct. 19 (Bloomberg) — Federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said. The pending crackdown, based on at least two years of investigation, targets securities professionals including hedge- fund managers, lawyers and other Wall Street players, the people said, declining to be identified because the cases aren’t public. Some probes, like the one that focused on Rajaratnam, rely on wiretaps. Others stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments. Investigators have struggled for years to build cases against large institutional investors such as hedge fund managers, who often deflect regulatory queries about suspiciously timed bets, arguing they’re statistical flukes amid their millions of trades. The case against Rajaratnam, built on recorded conversations within a web of alleged conspirators, offers a glimpse of how U.S. investigators are using more aggressive tactics to cut through the blizzard of trading and trace the flow of information. “If you’re going to shoot the king, you better shoot to kill,” said Bradley Bennett , a partner at Baker Botts in Washington who formerly focused on insider-trading cases as an SEC investigator. “If they’re going to take on a billionaire, they need to have the strongest possible cases. The defendant’s own words are the strongest possible evidence.” SEC spokesman John Nester declined to comment, as did Alejandro Miyar , a spokesman for the Justice Department. Intel, McKinsey, IBM Rajaratnam, who founded the Galleon Group hedge fund in 1997, was arrested with five alleged conspirators on Oct. 16 in what prosecutors called the biggest insider-trading ring targeting a hedge fund. Prosecutors said he and his firm reaped as much as $18 million by investing on tips from a hedge fund, a credit-rating firm and employees within companies including Intel Capital, McKinsey & Co. and IBM Corp. He hasn’t yet entered a plea. Rajaratnam’s lawyer, Jim Walden , said last week that prosecutors are misconstruing the evidence against his client and that the case isn’t as strong as prosecutors allege. U.S. senators including Pennsylvania Democrat Arlen Specter have pressed regulators for years to more aggressively scrutinize hedge funds. Some of those concerns were spurred by the SEC’s decision in 2006 to close an insider-trading probe of Pequot Capital Management Inc., once the world’s biggest hedge- fund manager, after investigators said they lacked evidence to bring the case. ‘Blue Sheets’ The SEC later reopened part of the inquiry focusing on whether Pequot abused information from a former Microsoft Corp. employee. In August, Pequot and founder Arthur Samberg , 68, said they may be sued by the agency. Insider-trading claims would be “without merit,” they said. Many cases begin when stock exchanges send the SEC reports on traders who place profitable bets shortly before corporate announcements. Someone who rarely trades may have difficulty explaining later what prompted an uncharacteristic investment. Hedge funds, on the other hand, can more plausibly attribute their windfalls to skill or chance. To overcome that hurdle, the SEC began using computer software about two years ago to sift hundreds of millions of electronic trading records, known as blue sheets, attached to the stock exchange reports about suspicious incidents, according to people familiar with the project. By looking for patterns in the library of data, they identified groups of traders who repeatedly made similar well-timed bets. UBS, Blackstone Once investigators find a cluster of correlated trades, they tap other sources of information to unravel how its members obtain and share tips, the people said. For example, if a group profits on trades before a series of corporate takeovers, the SEC may check so-called league tables listing which investment banks or law firms advised the deals. If one firm was involved in all of them, an employee there may be the source of the leak. The data-mining strategy yielded one of its first cases in February, when the SEC and U.S. prosecutors charged takeover advisers at UBS AG and Blackstone Group LP with taking part in an $8 million insider-trading case, people familiar with the inquiry said. Authorities used a “novel” technique to detect the scheme, the SEC’s lead investigator on the case, Daniel Hawke , said at the time, without elaborating. While the investigation of Rajaratnam didn’t stem from the data-mining project, it did start with the SEC’s identification of suspicious trades, people with knowledge of the case said. Wiretap Probes Continue Investigators developed at least one informant in the ring, who began meeting in November 2007 with agents from the Federal Bureau of Investigation, according to charging documents. Prosecutors also obtained warrants for wiretaps, a level of surveillance typically reserved for organized crime, drug syndicates and terrorism prosecutions. Surveillance during the probe of Rajaratnam, 52, led investigators to other suspects and more charges are likely, people familiar with the matter said. U.S. Attorney Preet Bharara said Oct. 16 the Justice Department will continue using wiretaps to root out insider-trading. The SEC is adopting other strategies to crack difficult cases. SEC Enforcement Director Robert Khuzami , a former federal prosecutor who joined the agency in March, said last week that he’s seeking greater access to grand-jury evidence and wants to expand deal-making and cooperation with informants. “Insider-trading cases are notoriously difficult to prosecute because the evidence is often circumstantial,” said Bill Mateja , a former Justice Department lawyer now at Fish & Richardson in Dallas. “If law enforcement is actively going to go out and target this with covert investigative techniques, I think it’s going to keep people on their toes.” The filed cases are U.S. v. Rajaratnam, 09-02306, and U.S. v. Chiesi, 09-02307, U.S. District Court for the Southern District of New York (Manhattan). To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net ; David Scheer in New York at dscheer@bloomberg.net .

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Begin early for maximum returns

October 11, 2009

hence can afford to take more risks. That means products which don’t guarantee returns can be considered. Equity and real estate are two such well-known products which have the potential to generate higher returns. In the case of real estate the amount

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McCann, Former Merrill Brokerage Chief, Settles Bank of America Litigation

October 1, 2009

By Patricia Hurtado Oct. 1 (Bloomberg) — Former Merrill Lynch & Co. brokerage head Robert McCann settled a lawsuit he filed in August seeking to force Bank of America Corp. to let him take another job. McCann alleged in his suit that Bank of America fired him without cause after rejecting his offer to resign, part of “vengeful conduct intended to both punish and humiliate” him for trying to quit the Charlotte, North Carolina-based bank, McCann said in court papers filed previously in the case. “We did settle the case and Mr.McCann can go back to work in late October,” said McCann’s lawyer, Steven Eckhaus, of the law firm Katten Muchin Rosenman LLP in New York. “We’re very pleased with the settlement.” “We think it was good decision by both sides and Mr. McCann is looking forward to his future,” Eckhaus said in a telephone interview. The terms of the accord are confidential, Eckhaus said. Lawyers for both sides appeared this morning before New York State Supreme Court Melvin Schweitzer in Manhattan. To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net

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Dianne McLeod: Debt Collectors Hounded My Husband To Death

September 24, 2009

TAMPA, Fla. — A widow claims that debt collectors hounded her husband to death with as many as nine caustic calls per day, causing stress that contributed to his fatal heart attack. She’s suing the Florida couple’s mortgage company in a unique wrongful death case. Dianne McLeod wants Green Tree Servicing to pay damages for what she said are illegal collection practices that led to her husband’s heart failure on Dec. 4, 2005. Her 57-year-old husband, Stanley, was already in poor health from a heart attack years earlier that also had left him on disability. An executive at Green Tree Servicing called the claim “outrageous and meritless.” Lawsuits against debt collectors alleging illegal practices are common. But McLeod’s Tampa attorney, William Howard, believes it’s the first time one has ever been sued for wrongful death. John Nemo, a spokesman for the Association of Credit and Collection Professionals, said he’s not aware of it happening before, either. “I think people in the legal community are watching to see how it unfolds, because it’s a pretty unique case,” Nemo said. Stanley McLeod had a heart attack while working at Sears in 1997, Howard said, and was never able to work full-time again. The family eventually fell behind on payments on their manufactured home in Keystone Heights near Gainesville. Dianne McLeod said the collection calls from Green Tree Servicing, sometimes as many as nine per day, intensified in August 2005 and wore on her husband’s health. “His breathing got really labored, his face was red, he was sweating, you could tell he was getting ill” after the calls would come, she said in an interview. Some of the calls were recorded on the family’s answering machine, and Howard said he is eager to play them for a jury. In one recorded message, an angry male caller says: “Stanley McLeod, you need to call Green Tree and get your act together and make a payment on your mortgage. Quit playing games.” Then, presumably referring to the emergency aircraft that flew McLeod to the hospital after his heart attack, the caller said: “Why don’t you have that helicopter pick you up and bring that payment to the office.” Other recorded calls gave him a deadline to pay a certain amount and threatened foreclosure. Some implored McLeod to call back so the company could try to work out payment arrangements with him. Howard said the number and harassing tone of the calls broke Florida law. He said the company also illegally called a neighbor and McLeod’s brother and grandson regarding the debt. Howard sued Green Tree on the family’s behalf in 2005, then added the wrongful death count in 2006 after Stanley McLeod died. The case has been winding its way through courts since. Earlier this month, the 2nd District Court of Appeal in Florida again ruled against Green Tree in the company’s efforts to force the case into arbitration. Howard said he will ask a judge to set the case for trial soon. He hasn’t decided yet how much he will seek. “What happened to Stanley McLeod happened to a lot of people,” said Howard, who has about 500 pending cases that claim undue harassment by debt collectors. “To be held hostage in your own home is a terrible thing. It’s a helpless feeling.” Howard works for the law firm of Morgan & Morgan, which has offices around the state, heading a division that sues debt collectors for unfair collection practices. Brian Corey, senior vice present and general counsel for Green Tree Servicing, said the company is preparing to take the case to trial. “We deny that collection calls, whether the content, number or timing, led to Mr. McLeod’s death, and we look forward to defending this matter in a court proceeding instead of in the media,” Corey said. Joe Little, professor emeritus at the University of Florida law school, said Howard will have to convince a jury that harassment by the mortgage company was egregious enough to warrant punishment, and that the stress of the calls hastened McLeod’s death. Howard isn’t likely to have an easy time connecting those elements for jurors, Little said, especially if McLeod was already in poor health when the calls began. Nemo said the federal Fair Debt Collection Practices Act generally outlines the do’s and don’ts of how collectors can operate. Most states also have statutes that augment the federal law, he said.

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Cioffi’s, Tannin’s Computers Are Sought as Evidence in Bear Stearns Trial

September 22, 2009

By Patricia Hurtado Sept. 22 (Bloomberg) — Prosecutors said evidence against former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin , including missing personal computers and Cioffi’s Ferraris, should be included when the two men go on trial next month for securities fraud in New York. Cioffi, 53, is slated to go on trial with Tannin, 47, Oct. 13 for an alleged fraud that helped bring down the securities firm. In papers filed today, prosecutors asked U.S. District Judge Frederic Block in Brooklyn, New York, to allow evidence that office equipment both men had at the time of the alleged conspiracy is missing. Lawyers for both men sought to exclude certain evidence from the case. “Both defendants’ contemporaneous records of their activities and recollections about what was happening during the course of the charged conspiracy in this case have suspiciously gone missing,” wrote Assistant Brooklyn U.S. Attorney James McGovern in a letter to the court. Prosecutors said while their indictment charges a conspiracy occurred between March 2007 and June 2007, notebooks belonging to Tannin, an attorney, appear to be missing for the period between Jan. 12, 2007, through May 2007. All notebooks prior to this period have been found. Tannin’s “tablet” personal computer is also missing. SEC Request Bear Stearns lawyers advised him to preserve documents on June 27, 2007, nine days after the U.S. Securities and Exchange Commission requested all documents in the case be preserved. He reported the tablet missing on July 26, 2007, after repeatedly demanding in March of that year that Bear Stearns reimburse him $3,364.00 for the computer. The U.S. today also asked to keep in evidence the notebooks which Cioffi controlled and used during this time period, which are also missing. Previously, Cioffi’s lawyers asked Judge Block to keep lifestyle evidence out of the case because it might improperly bias jurors against him. Lawyers for Cioffi and Tannin weren’t immediately available for comment. Records show Cioffi earned $15 million in 2005 and Tannin earned $1.9 million that year. In 2006, Cioffi earned $17.6 million while Tannin was paid $2.5 million. Insider Trading Cioffi, who managed the two funds, is charged with insider trading for redeeming $2 million from the Bear Stearns Enhanced Fund, one-third of the amount he’d invested in the funds. The government said evidence about Cioffi’s lifestyle belongs in the case, including his collection of three Ferraris, and real estate and assets that show his net worth. He owns properties that include a $12 million property in Southampton, New York, a $3.5 million home in New Jersey, a $3.25 million home in Vermont, and two Florida properties worth $7.1 million and $1.25 million. The U.S. said newly obtained records show Cioffi, in an effort to build and develop a Sarasota, Fla. condominium project, also encumbered his $5.7 million investment in a Bear Stearns fund he controlled. Losses from the condo project coupled with investor redemptions could have led to a loss of his entire investment and an immediate foreclosure of the fund, prosecutors said. ‘Over-Extended’ “The jury will learn that notwithstanding Cioffi’s significant income, he was over-extended financially,” prosecutors said. “In short, his financial decisions and over-extensions provided a strong motivating force for Cioffi to conspire with Tannin and lie to investors,” McGovern wrote. The U.S. said this evidence about the Florida condo project is important because of his attempts to pledge the fund as collateral, which they now believe he did over the objections of Bear Stearns, and that it occurred just before his $2 million withdrawal from the fund. Prosecutors also said that on Sept. 18 while prosecutors were investigating his Florida condo deal, Cioffi flew to Florida and attempted to obtain original bank documents which he knew were the subject of the government’s probe and the subject of a federal subpoena. In the indictment, prosecutors say Cioffi committed insider trading when he used non-public, material information to make a multimillion withdrawal and save his investment before both funds collapsed. Credit Crunch Cioffi and Tannin were indicted last year for misleading investors about the health of two hedge funds that failed in July 2007, costing investors $1.6 billion. The implosion helped trigger the credit crunch and the eventual sale of Bear Stearns to JPMorgan Chase & Co. In July, the judge rejected Cioffi’s bid to get the insider-trading charge dismissed on grounds that he didn’t owe a duty to his clients as a hedge fund manager. Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, and Tannin face as many as 20 years in prison if convicted of conspiracy to commit securities fraud. Cioffi faces an additional 20-year term if found guilty of insider trading. The case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court, Eastern District of New York (Brooklyn). To contact the reporter on this story: Patricia Hurtado in federal court in Brooklyn at pathurtado@bloomberg.net .

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Robert Kuttner: A Virtuous Tax

September 13, 2009

One prime cause of the financial collapse is that financial trading markets have become speculative worlds unto themselves. Instead of adding efficiency to the real economy, they mainly add risk that the rest of us now have to pay for. There are many ways to damp down financial speculation, but a very effective strategy is to tax it. Given the huge costs of the clean-up (now being borne mainly by taxpayers) it would make a lot more sense to require financial markets to pay for their own bailout. One very neat way of doing this is through a very small tax on all financial transactions. Ordinary retail sales are taxed, as are wages. But oddly enough, financial transactions are exempt from tax. This idea was first proposed in modern form by the Nobel Laureate James Tobin in 1972, after the collapse of fixed exchange rates led to massive increase in currency speculation. Tobin proposed a small tax on short term currency trades to make extreme speculation less profitable. Since them, short term speculation and the invention of exotic securities that lend themselves to speculation has become the dominant activity of Wall Street. So a Tobin-style tax on all financial transactions has three big things going for it. First, a very small tax in all kinds of financial transactions, say one tenth of one percent, would not be felt by legitimate long-term investors. But in the case of traders who get in and out of exotic derivatives minute by minute, making huge numbers of quickie trades, it would add up to a lot of money and would cut into both their profits and their entire socially destructive business strategy. So a universal financial transaction tax would discourage purely speculative activities and encourage investing for the long term. Second, such a tax could pull in hundreds of billions of dollars a year, at a time when large deficits are giving the political right (and center) an excuse to cut social spending, and no form of taxation is popular. But this tax would be the least unpopular. It would not just fall primarily on the very, very wealthy. It would fall on the least socially defensible part of Wall Street, the people who make their billions from speculative short term trades. And that raises the third benefit. What’s missing from the entire debate about financial reform is a progressive brand of populism. Regular people know that they got done in by excesses on Wall Street, and they see a Democratic administration shoveling trillions of dollars to the same Wall Street banks that caused the mess. No wonder people are confused about whether government is on their side. What is overdue is a little bit of populist retribution against the people who brought down the system — and will bring it down again if the hegemony of the traders is not constrained. Do we have a shot of injecting the case for a Tobin Tax into the debate? In the past few weeks, Adair Turner, the head of Britain’s Financial Service Authority, c autiously expressed support for the general idea . Peer Steinbrueck, Germany’s finance minister, explicitly called for such a tax last week , as did the AFL-CIO. In an unguarded moment early in his career, even Larry Summers, President Obama’s market-friendly chief economic adviser, embraced the idea , as throwing some salutary sand in the gears when financial markets “worked too well.” The Group of 20 meetings next week in Pittsburgh are not likely to produce very much in the way of real reform, because even after the disgrace of Wall Street, the usual suspects are still making policy in most nations. But a global campaign for a Tobin Tax should begin in earnest now. It could bear early fruit, as speculative excess continues and as government finds itself searching for defensible taxes. Robert Kuttner is co-editor of The American Prospect, www.prospect.org, and a senior fellow at Demos, www.demos.org. His recent best-selling book is Obama’s Challenge .

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